When Can Your Home/Land Improvements Be Deducted in One Year?

Did you buy a fence, install a patio or deck, or remodel a room in your home this year?

If so, it’s possible that you might be able to claim these expenses in one year rather than depreciating them over many years.

Before this new rule, family child care providers had to depreciate a fence, patio or driveway over 15 years and home improvements over 39 years. So, this new rule will be a major tax benefit to some providers.

A new IRS Tangible Property Regulations called the Safe Harbor for Small Taxpayers, allows family child care providers to deduct some home improvements in one year if the expenses meet the following qualifications: The cost of all house repairs/maintenance and home improvements (including land improvements) cannot exceed the lessor of $10,000 or 2% of the unadjusted basis of your home.

Let’s sort this out by first looking at what expenses can be applied to this rule.

House Repairs/Maintenance

Repairs and maintenance refer to expenses that help maintain the value of your home.

Examples include: painting (inside or out), fixing broken glass, furnace cleaning, patching the driveway, installing corner wall guards, plumbing repairs, lead paint removal, tree removal, salt for a water softener, wallpapering, window repair, carpet or rug cleaning, etc.

Do not count repairs to your personal property (items not attached to your home or land) as part of this rule. You can always deduct these items in one year. Examples: re-covering a couch or chair, repairing a computer or washing machine, or fixing broken toys or household items.

Home/Land Improvements

Home or land improvements are expenses that result in a "betterment" to your property. Examples of home improvements are: new deck, replacing more than half your windows, new siding, add an addition to the home, etc. Examples of land improvements are: new fence, patio or driveway.

Add up all of your house repairs/maintenance and home/land improvements each year.

Deduction Limitation

You can deduct these expenses as long as they are the lessor of $10,000 or 2% of the unadjusted basis of your home. The unadjusted basis of your home is the price you paid for your home (minus the value of land at the time you bought it, plus the value of any home improvement you made before and after your business began).

So, if the unadjusted basis of your home is $100,000, 2% of that is $2,000 and you could deduct your repairs/maintenance and improvements if they totaled less than $2,000. If your expenses are $3,000 you cannot apply this rule to the first $2,000. If they total more than $2,000 you can deduct the home repairs/maintenance in one year, but you must depreciate home/land improvements.

If the unadjusted basis was $200,000, the limit would be $4,000 ($200,000 x 2% = $4,000). If the unadjusted basis was $400,000 the limit would be $8,000. If the unadjusted basis was above $500,000 then you would be limited to $10,000.

We can see how this all comes together with the examples below. We will use a Time-Space Percentage of 40% for these examples.

Example #1

Bernice installed a new deck for $4,500 and made no home repairs. Her home’s unadjusted basis is $250,000. Because $4,500 is less than $5,000 ($250,000 x 2% = $5,000) she can use this rule. She could deduct $1,800 for the deck in one year ($4,500 x 40% = $1,800), rather than having to depreciate it over 39 years.

Example #2

Bernice installed the same deck but also spent $2,000 on house repairs. She can’t use this rule because the $6,500 of repairs and improvements ($4,500 + $2,000) is higher than $5,000. She can deduct $800 of the repairs ($2,000 x 40% = $800) in one year, but she must depreciate the deck over 39 years.

Example #3

Maureen bought a fence for $8,000 and made no other home repairs. The unadjusted basis of her home was $350,000. She cannot use the rule because $8,000 is more than $7,000 ($350,000 x 2% = $7,000). Therefore, she must depreciate her fence over 15 years as a land improvement. If she was required to install the fence, she could depreciate the full price.

Example #4

Keri had the following expenses in one year: $4,000 kitchen remodel, $500 to re-cover a sofa, $600 deck stain, $250 furnace and duct cleaning, and $150 computer repair. The unadjusted basis of her home is $260,000. Her deduction limitation is $5,200 ($260,000 x 2% = $5,200). She can deduct separately the business portion of her sofa and computer expenses because these are considered repairs to her personal property, not to her home. The remaining expenses total $4,850 ($4,000 + $600 + $250). Since this is less than $5,200 she can deduct $1,940 ($4,850 x 40% = $1,940) in one year.

Example #5

Arnetta had the following expenses in one year: $3,600 new kitchen floor tile, $500 to paint the outside of her home, and $600 to repair her stroller, bicycles, and dehumidifier. The unadjusted basis of her home is $200,000 ($200,000 x 2% = $4,000). Her house repairs and improvements are $4,100 ($3,600 + $500), so she can’t use this rule. She must depreciate her floor tile over 39 years and can deduct the $500 paint and other repairs in one year. If she didn’t paint her home that year she could deduct the floor tile in one year.

Annual Tax Statement

If you use this rule you must attach a statement to your tax return indicating that you are electing to use this rule.

The statement should read:

“Section 1.263(a)-3(h) De Minimis Safe Harbor Election

Your name _________________

Your address __________

EIN or Social Security Number __________

For the year ending December 31, 20__

I am electing the safe harbor election for small taxpayers under Treas. Reg. Section 1.263(a)-3(h) for the following: (list your improvements).”

This rule must be elected each year you want to use this rule. If next year you didn’t purchase any home improvements you would not file this statement.

To take advantage of this rule you may want to make some home repairs or improvements this month, or wait until next year.

Tom Copeland - www.tomcopelandblog.com

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