Rental Property Owners Can Maximize Tax Deductions

Rental property owners should be aware of two regulations that can help them increase tax deductions on their 1040 tax forms. Provisions under the tangible property regulations and the small taxpayer safe harbor each offer attractive benefits.

It is important – and advantageous – for taxpayers to gain some familiarity with the regulations, as we have seen the regulations affect many taxpayers—from companies to individuals who own rental property reported on their 1040 tax forms.

Tangible Property

Tangible property regulations, issued by the IRS in 2013 and effective for tax years after January 1, 2014, address a wide variety of topics of interest to rental property owners, including materials and supplies; repairs and maintenance; capital expenditures; and amounts paid for the acquisition and improvement of tangible property.

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. Examples of tangible property include computers, office equipment, maintenance equipment and furniture. For tax years beginning on or after January 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.

Safe Harbor

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, such as leak repairs or window improvements, but the amount cannot exceed the lesser of $10,000 or two percent 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, please contact anyone in Smith and Howard’s tax group at 404-874-6244 or complete the form below.