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Old 03-10-2015, 08:18 AM
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Safe harbor for small taxpayers - eligible basis

I recently began renting the basement of my house and made some improvements (added a kitchen and appliances) in order to do so. I'd like to use the Safe Harbor for Small Taxpayers to deduct these expenses instead of capitalizing them.

First, any general rules for doing so I might not know about?

Second, I've read the max that can be deducted under the safe harbor is $10k or 2 percent of an eligible building, whichever is smaller. How do you calculate the 2 percent here, since the basement is part of the building and some of the improvements were to whole-house systems?

Thank you!



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Old 03-11-2015, 02:22 AM
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First, any general rules for doing so I might not know about?==========>>>>>>>>>>>> to understand the difference between making an improvement and making a repair to your rental property IS VERY CRUCIAL since they have different tax implications, as well as different effects on the value of your property. added a kitchen and appliances will add value to the property for years to come and not just in the current tax year. You can not Deduct the full value of the Improvements on Your Taxes; this is because improvements have a useful life and add value in subsequent years, not just in the year the improvement occurred. Improvements must be capitalized and depreciated according to a set depreciation schedule (it will be different for each asset). You must divide the cost of the improvement over the useful life of the improvement and then take an annual deduction based on the given year's expense.for instance, say you performed $7k of work on your property. It is considered an improvement. Therefore, you must deduct it over a set depreciation schedule. We will use a depreciation schedule of 10 years. We will assume there is no salvage value, meaning it will be worth nothing after the 10 years. We will also assume straight-line depreciation, meaning the cost will be spread out evenly over the 10 years. Thus, you can claim ($7000/10) an expense of $700 each year for the next 10 years. Assuming you are at a 28% tax rate, you will save ($1000*.28) $280 in taxes for the year. You should always consult the IRS or a irsea/ a cpa to decide what deductions are applicable to your specific situation.








Second, I've read the max that can be deducted under the safe harbor is $10k or 2 percent of an eligible building, whichever is smaller. How do you calculate the 2 percent here, since the basement is part of the building and some of the improvements were to whole-house systems?======>>>> Remodeling or finishing a basement to create a basement apartment is likely to be the most significant home improvement you could possibly complete on your house;as the cost is actually an improvement and not a repair, it needs to be added to the basis of the asset and depreciated. The key distinction between a repair and an improvement is that an improvement betters, adapts or restores the asset. If the basement space is 40% of the square footage of the home, then you can deduct 40% of the mortgage interest/property tax/insurance/water tax and util (if you pay for them) of the entire home. And don't forget to check with you city and municipality on conditions and regulations in order to get a certificate of occupancy, that is if basement apt's are even allowed.



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