The routine maintenance safe harbor (IRS Reg. § 1.263(a)-3(i)) is another safe harbor enacted due to the IRS repair regulation issued in 2013. It is one of three safe harbors:
See the Safe Harbor for Small Taxpayers and the De Minimis Safe Harbor.
Expenses that qualify as routine maintenance under this safe harbor are currently deductible regardless of cost. There are no annual dollar limits and any landlord can use this safe harbor regardless of income levels.
Routine maintenance is recurring work a landlord does to keep an entire building, or each of the building’s nine systems (units of property), in ordinarily efficient operating condition.
Specifically, routine maintenance is carried out through two activities:
- Inspection, cleaning, and testing of the building’s units of property
- Replacement of damaged or worn parts with comparable and commercially available replacement parts
The first activity has generally always been deductible but the second activity of deducting replacement parts is where this safe harbor helps landlords. Previously, landlords may have been required to capitalize and depreciate replacement parts. However, landlords may now currently deduct these costs without regard to total expense.
There are limits that must be met; the 10-year rule and no betterments rule.
The 10-year rule states that the replacement part will qualify as routine maintenance only if you reasonably expect to perform such maintenance again within the next 10 years. Basically, you must expect to make the same replacement twice within a 10 year period. This rule typically eliminates the ability to deduct larger components of the building such as roofing, windows, HVAC, and land improvements.
The no betterments or restorations rule prevents landlords from deducting capital improvements and ensures that costs deducted under this safe harbor are only those that keep the property in ordinarily efficient operating condition. The maintenance must be attributed to the taxpayer’s use, not that of a prior owner. This limitation excludes rehabilitation costs from being classified as routine maintenance.
A word of warning: costs deducted under the routine maintenance safe harbor also count against the annual allowance under the safe harbor for small taxpayers.
To claim the routine maintenance safe harbor, you must adopt it as a method of accounting m. Unlike the safe harbor for small taxpayers, you do do not make an annual election with your tax return.
