Dear Friends,

When it comes to maximizing the value of an apartment building—both in terms of cash flow and eventual sale proceeds—attention to detail is everything. At The Ponce Real Estate Group, Anna Khomut and I have spent countless hours poring over 12-month trailing financials, helping clients position their assets in the best possible light before going to market. Our deep understanding of both operational efficiencies and tax strategy is what sets our team apart.

One of the most overlooked, yet critical, areas of real estate ownership is the distinction between repairs and improvements—especially when it comes to tax treatment and asset valuation. This isn’t just about accounting semantics. It has a real impact on your tax liability, basis, and ultimately, the net proceeds from a sale.

Here's the core difference:

·         Repairs maintain the property and are typically deductible in the year they’re incurred.

·         Improvements add value or extend the property's life and must be capitalized and depreciated over time, increasing your property’s basis.

Why does this matter? Because increased basis means more depreciation, and when you sell the property, all that depreciation must be recaptured—which can significantly reduce your net profit.

Many investors assume they have to capitalize major expenses, but with the right strategy, many costs can be fully written off in the same year under the IRS’s De Minimis Safe Harbor and Bonus Depreciation rules.

Here are a few practical examples:

·         Under the De Minimis Safe Harbor, any individual expense under $2,500 (per item on an invoice) can be written off immediately, even if it would typically be considered an improvement.

·         Let’s say you build a new deck. If your contractor sends you one invoice for $30,000, you’re stuck depreciating that expense. But if the invoice breaks it down—$2,000 for railings, $1,800 for subfloor, $500 for treads, and so on—each individual line item can potentially qualify as a repair under the de minimis rule.

·         Even labor, if separately itemized and under $2,500, can be deducted in full that year.

However, to take full advantage of these rules, it’s essential to file the proper election: a De Minimis Safe Harbor Election under IRS Regulation 1.263(a)-1(f). It’s just a simple one-page attachment to your tax return, but if it’s missing—even if you meet all the criteria—the IRS can disallow your deductions in an audit. Many tax software programs do not generate this automatically, which is why it's often missed.

At The Ponce Real Estate Group, Anna and I make it a priority to educate our clients and collaborate closely with their accountants to ensure every dollar spent on property maintenance or upgrades is treated optimally. These seemingly small tax choices can translate into tens or even hundreds of thousands of dollars in added value when it comes time to sell.

Whether you own a 4-unit building or a 100-unit complex, we bring not just market knowledge, but also operational and financial insight to help you unlock the full potential of your property.

If you’d like us to review your apartment financials and highlight areas where you can improve valuation or minimize tax drag before a sale, we’re happy to help.

Warm regards,
Frank Ponce (310) 503-4158
Anna Khomut (310) 780-0148
The Ponce Real Estate Group