A de minimis safe harbor election lets real estate owners expense lower-cost items immediately, simplifying tax compliance and enhancing deductions.
Real estate owners and operators looking for ways to streamline tax compliance and enhance deductions can look to an often-overlooked strategy, the de minimis safe harbor election.
This is a practical election that allows eligible taxpayers to expense certain lower-cost items immediately, rather than capitalizing and depreciating them over time.
What is the de minimis safe harbor election?
Under the IRS’ Tangible Property Regulations, the de minimis safe harbor election permits businesses to deduct tangible property costs, such as equipment, supplies, or building improvements, up to a specific dollar threshold per item or invoice.
- $2,500 per item/invoice for taxpayers without an applicable financial statement (AFS), such as most private real estate partnerships and LLCs
- $5,000 per item/invoice for those with an AFS (e.g., audited financials)
The election can be made annually by attaching a statement to a timely filed federal tax return. When used correctly, it can reduce administrative burden and generate meaningful tax savings.
Why de minimis safe harbor matters for real estate
In real estate, frequent purchases of supplies, materials, and minor repairs are common. The de minimis safe harbor simplifies the decision to expense or capitalize these costs, offering benefits such as:
- Lower taxable income in the year of purchase
- Reduce time and costs associated with tracking small, fixed assets
- Streamline accounting processes across multiple properties or entities
What to consider before making the election
Before making the de minimis safe harbor election, real estate owners and operators should perform a thoughtful analysis, including:
- Recurring purchases: Review the nature and volume of recurring expenditures such as tools, appliances, supplies, and repair costs.
- Book-tax consistency: Verify that amounts expensed for tax purposes are also expensed for financial statement purposes.
- Capitalization policy: While a written capitalization policy is not required for those without an AFS, having one in place can strengthen a tax position.
- Long-term planning: Understand how expensing vs. capitalizing affects your property basis and future depreciation.
The de minimis safe harbor election is a simple yet powerful tax strategy that can improve cash flow, reduce audit risk, and ease administrative complexity. When applied thoughtfully, it becomes a valuable part of a real estate owner’s overall tax plan.
Need help evaluating whether this election is right for your portfolio? CLA’s real estate professionals can guide you through the decision and help implement it consistently across your properties.