Building for Routine Maintenance Safe Harbor

Routine Maintenance Safe Harbor

The Routine Maintenance Safe Harbor is one of the most overlooked safe harbors within the mandatory Tangible Property Regulations under §263a (1-3).

If you are cost-segregating a property, you can assume your cost segregation firm has never heard of the Routine Maintenance Safe Harbor. The reason is the majority of cost segregation firms, especially the larger ones, do not understand the complexities of real estate taxation.

THIS OVERSIGHT WILL COST YOU THOUSANDS

The Routine Maintenance Safe Harbor (RMSH) is a simple concept and has been a part of the US Tax Code for quite a while.

The Tangible Property Regulations (TPRS) specify that the costs of performing routine maintenance for property other than a building or the structural components of a building are not required to be capitalized as a betterment, adaptation, or restoration of material improvement.

Under the Routine Maintenance Safe Harbor within the Tangible Property Regulations, an amount paid does not improve a unit of property if it is for a recurring activity that a building owner (or a lessor) expects to perform again in less than ten years. So, if the expenditure, no matter the cost, was to keep the building in its everyday, normal operation condition AND did not improve the unit of property, building system, or individual building component, the expenditure could be expensed.

“The final regulations contain a safe harbor for routine maintenance for buildings. The inclusion of a routine maintenance safe harbor for buildings is expected to alleviate some of the difficulties that could arise in applying the improvement standards for certain restorations to building structures and building systems.” IRS IRB 2013-43

There are four exceptions to the RMSH, but they rarely affect the expenditures we see every day on a depreciation schedule.

  1. Amounts paid for the betterment of a unit of property,
  2. Amounts paid to adapt a unit of property to new or different use, and
  3. Amounts paid for repairs, maintenance, or improvement of network assets.
  4. Repairs were done to ameliorate an existing condition that arose before the building was purchased.
  5. Routine maintenance does not include expenditures that return a unit of property or component to its efficient operating condition if the unit of property or component has deteriorated to a state of disrepair and is no longer functional for its intended use.

The remarkable thing about the RMSH is that the second expenditure, expected to be completed within ten years, doesn’t have to be completed in the ten years following the initial expenditure. It just must be expected to be completed within ten years. Therefore, the taxpayer should use their experience, industry best practices, and warranties to determine if the expenditure will likely be repeated in ten years.

Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science Degree in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.