Optimizing Residential Real Estate Deductions

The tax deduction rules for residential landlords have changed dramatically in recent years, with the release of the final tangible property regulations in 2013 (T.D. 9636) and the creation of the qualified business income (QBI) deduction under Sec. 199A by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Landlords are now much more likely than before to be able to deduct most of their current expenditures.

By Janet C. Hagy, CPA, Austin, Texas

The starting point is to determine whether an expenditure is for a betterment, restoration, or adaptation. A comprehensive remodeling or correcting a preexisting defect would be a betterment or restoration and would need to be capitalized. The mortgage interest and property taxes incurred during construction may need to be capitalized as well.

If the expenditure is not a betterment, restoration, or adaptation, the next step is to determine whether it can be expensed under the de minimis, small taxpayer,or routine maintenance safe harbor. The de minimis and small taxpayer safe-harbor elections apply to businesses and farms as well as to rental properties.


Under the tangible property regulations and Notice 2015-82, expenditures for tangible property that would otherwise be capitalized can be expensed if the item costs $2,500 or less and the taxpayer makes the proper election. Taxpayers with applicable financial statements have a de minimis cap of $5,000 per item. The taxpayer makes the election annually by…

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