Small Expenses, Big Savings: Leveraging the De Minimis Safe Harbor Election

When it comes to getting the most out of your tax deductions in real estate, every little detail counts. One often-missed but incredibly useful provision in the IRS tax code is the De Minimis Safe Harbor Election. This handy tool lets real estate investors write off certain low-cost items right away instead of having to capitalize and depreciate them over time.

So, how does this election work alongside cost segregation studies? Is it possible to use both strategies at the same time?

In this post, we’ll walk you through:

• What the De Minimis Safe Harbor is

• How to qualify and apply it

• What you can expense under it

• How it complements cost segregation

---

What Is the De Minimis Safe Harbor Election?

De Minimis Safe Harbor(DMSH) is a provision under IRS Reg. §1.263(a)-1(f) that allows businesses, including landlords, write off low-cost tangible property items right away instead of having to capitalize and depreciate them over several years.

This safe harbor makes it easier to manage the accounting for those smaller purchases, which can save you both time and potentially a significant amount on your taxes.

Key Requirements

To use the De Minimis, you must meet the following criteria:

Have an Applicable Financial Statement (AFS)

If you do have an AFS (like audited financials), the safe harbor limit is $5,000 per item or invoice.

If you do not have an AFS (most small real estate businesses fall here), the limit is $2,500 per item or invoice.

Written Policy (Optional for Small Businesses)

Businesses with AFS must have a written accounting policy in place at the beginning of the year to expense items under $5,000.

If you don’t have an AFS, a written policy isn’t required—but it’s a best practice to document your intent.

Election Made Annually

The De Minimis Safe Harbor election must be made each year by attaching a statement to your timely filed tax return (including extensions).

What Qualifies?

You can deduct:

• Furniture and appliances under $2,500

• Small tools and equipment

• Décor and electronics for rentals

• Installation or delivery charges if included in the total invoice amount

🔎 Example: You furnish a rental with a $2,200 couch, a $1,800 dining set, and a $1,000 TV. Instead of depreciating over 5–7 years, you can deduct all of it in year one using DMSH.

---

How the De Minimis Safe Harbor Works with Cost Segregation

Here’s where things get interesting: De Minimis and cost segregation can work hand-in-hand, but they serve different purposes.

➕ Cost Segregation:

• Identifies and accelerates depreciation of building components (e.g., carpeting, cabinets, HVAC, land improvements)

• Requires a formal engineering-based study

• Applies to items that are part of the building structure

➕ De Minimis Safe Harbor:

• Applies to movable, low-cost personal property not considered part of the building

• Lets you bypass depreciation entirely for those assets

The Strategy:

After a cost segregation study, De Minimis can be layered on top to capture additional deductions:

Type of Asset	Eligible for Cost Seg?	Eligible for DMSH?	Example
Built-In Cabinets	✅ Yes	❌ No	Depreciated via cost seg
Refrigerator	❌ No	✅ Yes	Deduct if <$2,500
Light Fixtures	✅ Yes	❌ No	Accelerated depreciation
Portable Microwave	❌ No	✅ Yes	Deduct immediately

By combining Cost Seg and DMSH, you get more deductions in year one, especially important when optimizing cash flow or offsetting large gains.

---

Real-World Example: STR Property Furnishing

Let’s take a look at a real-world scenario: furnishing a short-term rental property. Picture this... you invest $9,000 to furnish your rental with some great pieces, including:

• A cozy $2,200 couch

• A luxurious $2,300 king bed

• A stylish $1,800 dining table

• A practical $1,400 dresser

• A handy $1,300 washer/dryer set

All these items are under $2,500 each and aren’t considered structural. Thanks to DMSH, you can deduct the entire $9,000 in the first year, no need to stretch it out over 5 or 7 years.

Now, if you combine this with a cost segregation study for the property, you’re really maximizing your deductions, potentially eliminating a hefty portion of your taxable income.

---

⚠️ A Few Cautions ⚠️

• DMSH only applies to purchases under the threshold — if you buy a $3,000 fridge, you must capitalize and depreciate it unless you have an AFS.

• You must elect DMSH each year — missing the election means you lose the deduction.

• The item must be for business use — personal-use items don’t qualify.

• Audit trail matters — keep all receipts and invoices to support your election.

---

Final Thoughts

The De Minimis Safe Harbor election is an incredibly useful option for real estate investors who want to make recordkeeping easier and boost their tax savings, especially when it comes to furnishing properties or picking up low-cost assets. When paired with cost segregation, it packs a serious punch:

✔️ Cost Segregation takes care of your structural components

✔️ De Minimis picks up everything else that’s under $2,500

Together, these strategies can really help lower your taxable income in the year you acquire or renovate a property.

Curious about how much you could save?

Check out our directory to find a tax advisor who offers a free cost segregation estimate and can help you integrate the safe harbor election into your tax strategy.