- November 4, 2023
- Posted by: Web Digital Media Group
- Categories: estate planning, real estate investors
The 3 Safe Harbors That Every Investor and Landlord Should Know About
As savvy investors, you are always looking for ways to optimize your rental property investments and minimize tax liabilities.
Today, we want to share three valuable safe harbors that can help you save thousands of dollars in taxes each year while better-structuring repair and maintenance schedules for your properties.
1. De Minimis Safe Harbor (DMSH):
The De Minimis Safe Harbor, enacted in response to the IRS repair regulation issued in 2013, allows landlords to deduct any cost substantiated by invoices, as long as each cost does not exceed $2,500 ($5,000 if applicable financial statements are available). Make sure to itemize all invoices, as this limit applies to each item rather than the aggregate invoice total. The DMSH originally had a $500 limit in 2013, but the IRS later increased it to $2,500. Avoid breaking down the cost of a component into its individual parts on an invoice to prevent abuse under this rule.
2. Routine Maintenance Safe Harbor:
Also stemming from the IRS repair regulation of 2013, the Routine Maintenance Safe Harbor allows landlords to currently deduct qualifying routine maintenance expenses, regardless of cost. There are no annual dollar limits, making it a valuable tool for any landlord, regardless of income level. Routine maintenance involves recurring work to keep the building or its nine systems (units of property) in efficient operating condition. This safe harbor permits the deduction of replacement parts without capitalization and depreciation, as long as certain conditions, such as the 10-year rule and no betterments rule, are met.
3. Safe Harbor for Small Taxpayers (SHST):
The SHST, the third safe harbor resulting from the IRS repair regulation, enables landlords to deduct all annual expenses for repairs, maintenance, improvements, and other rental building costs on Schedule E. To qualify for SHST, landlords need to meet specific restrictions, including rental business size limitations.
Rental Business Size Limitations
Landlords cannot use this SHST in any year that the following limitations are exceeded:
- $1 Million limit on an unadjusted basis – note that unadjusted excludes land, land improvements, and personal property identified through a cost segregation study.
- Annual expenses for repairs, maintenance, and improvements, cannot exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.
- Annual gross income for the landlord must be less than $10MM for the three preceding tax years.
- For the Routine Maintenance Safe Harbor, make sure the replacement part is expected to require maintenance again within the next 10 years to qualify.
- Avoid using the SHST in any year when your rental business exceeds the stated limitations.
- Keep meticulous records of all expenses to justify the use of the Safe Harbors and enhance your tax planning strategy.
By understanding and implementing these three safe harbors, you can significantly reduce your tax burden and maximize the returns on your real estate investments. Remember, tax planning is a crucial aspect of real estate ownership, and with the right knowledge and guidance, you can optimize your financial success.
If you have any questions or need assistance in applying these safe harbors to your specific situation, feel free to reach out to our team. We are here to help you make the most of your real estate ventures.