Inside newly finished living room

Repairs and Improvements to Your Rental Property

When you own property, making repairs and improvements is necessary as the appliances and furniture will become worn, stained or outdated. However, the IRS provides an opportunity for property owners to deduct expenses used on the yearly income tax depending on the type of renovation. The IRS usually categorizes this renovation as a repair or improvement, which alter the way you can deduct your taxable income. As such, there are significant differences between repairs and improvements for rental properties regarding taxes.

What Qualifies as Home Repairs?

Repairs are commonly small fixes of minor problems such as leakages and sealing of holes done to the home (or rental) to keep it in good shape and more habitable. Most qualified rental property repairs charge no more than $500 for the services despite the amount of work in place. The IRS, therefore, offers a deduction of the costs used in repairs from your existing tax liability.

If you’re undertaking repairs across all your rental properties, the deductions are usually made in full but deducted from each property on the situation of multiple repairs on different features but the same owner.

What Qualifies as Improvements?

Improvements generally mean the replacement of certain parts of the house or performing a complete renovation with new products. It includes intensive labor and the costs associated with the addition of new items or an upgrade to an existing one. Improvements tend to add value to the property as well as increase profits to the owner. Because of this, improvements may lead to an increase of yearly income taxes in the coming years.

Because of this, the IRA does not guarantee complete deduction of the taxes, but an owner may deduct some amount over the years. You are thereby allowed to deduct small fees from the total amount used in the improvement process from each property renovated. Some examples of improvements include heating and air conditioning units, lawn and landscaping, additional renovations and interior enhancements.

Comparisons Between Repairs and Improvements

Repairs specifically entail minor maintenance such as repairing a cracked slab whereas an improvement will involve the addition of structural support. Another comparison consists in fixing a damaged AC fan or vent, but an improvement comprises of purchasing a new central air conditioning unit. Repairs are considered correcting a problem due to wear and tear of the existing equipment, appliances or furniture, but improvements include the buying of a new device and getting rid of the existing one. On tax forms, repairs guarantee total deduction on your taxes while improvements to your rental property only include a partial deduction of your yearly income taxes.

Capital Expenses

The IRS categorizes the different types of capital expenses as a way for property owners to either capitalize or deduct expenses. Capitalizing your expenses may result in restoring, betterment or adapting the property for unique use. The strategy of maximizing in such cases also increases your annual income while reducing the expenses used in repairs and renovations.

Using expenses to improve the home is a form of betterment; this can be done through the increase of space, quality, strength or fixing of pre-existing problems. Capitals expenses may include restoration by replacing crucial structural parts of the property through the repairing of damaged regions, thereby maintaining the structure and appearance of the previous design. Lastly, adaptation expenses include changing the use of the property from the initial usage to adopt a new method (such as a rental).

If you need assistance figuring out how best to deduct expenses from your existing property (or rental), then contact a qualified CPA for help.

About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.