Real estate investors know (or will soon find out) that not every dollar you spend on a property is immediately deductible. For example, your mortgage payment has a deductible and non-deductible component – the portion that goes to interest is deductible, but the portion that goes to principal is not.

The same concept applies to equipment, systems, repairs, etc. that one might make to a property in their portfolio – it is not always a forgone conclusion that amounts spent are deductible that year (although in general, for every dollar you spend on a property, you will realize a benefit from it, but it may take decades or until you completely dispose of the property, to realize the tax benefits.

Enter the Small Taxpayer Safe Harbor (STSH). The IRS, in an effort to simplify the administration of the tax code for landlords and smaller real estate investors, made effective as of 2014 the STSH. Taxpayers whose average annual gross receipts for the last three tax years are $10M or less AND have an eligible building with an original cost of $1M or less can qualify for the STSH, which allows a deduction (per building) of the lesser of:

• $10,000; or
• 2% of the building’s original cost

While the deduction doesn’t necessarily seem spectacular at first blush, the STSH is incredibly useful for real estate investors and landlords to help them and their tax advisors to quickly have certainty certain repairs, improvements, replacements, etc. will be deductible. When it comes to repairs and upkeep of property, whether you can expense something immediately can be a gray area, relying on facts and circumstances, rather than dollar amounts. Without the STSH, you are left applying the betterment, adaptation, restoration (BAR) test to determine whether a cost is a repair (currently deductible) or whether a cost is an improvement (must be capitalized and depreciated).

If STSH costs are identified, the proper election must be made with the taxpayers tax return for that year.