Owners of rental property may be surprised to learn that they may take a tax deduction on their 1040 tax returns. Tangible property regulations, issued by the IRS in 2013, address a wide variety of topics, including materials and supplies; repairs and maintenance; capital expenditures; and amounts paid for the acquisition and improvement of tangible property.
It is important – and advantageous – for taxpayers to gain some familiarity with the regulations, as we have seen the regulations affect almost all of the taxpayers we work with—from large public companies to individuals who own rental property reported on their 1040 tax forms.
The tangible property regulations allow taxpayers to immediately deduct purchases of tangible property below certain thresholds under the de minimis safe harbor. This is especially helpful to individuals who own rental property and report rental income on their personal income tax return. For tax years beginning on or after Jan. 1, 2016, the limit is $2,500 and is applied on a per item or per invoice basis. An annual election must be made each year on your timely filed tax return.
Another election that is beneficial for individuals who report rental property on their 1040 is the small taxpayer safe harbor. This safe harbor allows taxpayers to immediately deduct improvements made to the property, but the amount cannot exceed the lesser of $10,000 or 2% of the unadjusted basis of the building. To qualify, the taxpayer must have annual business gross receipts of less than $10 million and an eligible building with a cost of $1 million or less. This is also an annual election that must be made on your timely filed tax return.
If you want to learn more about tax breaks under the tangible property regulations or if you have questions about any other individual services, contact Jessica Pagan, CPA at (334) 887-7022 or by leaving us a message below.