Safe Harbor for Small Taxpayers

The Safe Harbor for Small Taxpayers (SHST) is one of three safe harbors enacted due to the IRS repair regulation issued in 2013.

See the Routine Maintenance Safe Harbor and the De Minimis Safe Harbor.

The SHST allows landlords to currently deduct on Schedule E all annual expenses for repairs, maintenance, improvements, and other costs for a rental building (IRS Reg. § 1.263(a)-3h).

There are restrictions to qualify (listed below) but landlords need to ensure they keep careful track of all their annual expenses for repairs, maintenance, and improvements to justify the use of the safe harbor.

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Rental Business Size Limitations

Landlords cannot use this SHST in any year that the following limitations are exceeded:

  • $1 Million limit on unadjusted basis – note that unadjusted excludes land, land improvements, and personal property identified through a cost segregation study
  • Annual expenses for repairs, maintenance, and improvements, cannot exceed the lesser of $10,000 or 2% of the building’s unadjusted basis
  • Annual gross income for the landlord must be less than $10MM for the three preceding tax years.

If you qualify for the SHST, you won’t have to worry about determining if you have repairs or improvements nor will you have to worry about the De Minimis Safe Harbor or Routine Maintenance Safe Habor.

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