While rental properties mean tax benefits for investors, tax season can be stressful and confusing for Landlords. To make things easier and ensure you comply with all tax laws, working with a tax professional is often a good idea. Even so, it’s important to be familiar with key tax laws and understand how they impact your rental business when it comes to Repairs and Improvements to Your Rental Property.
One key tax rule that Landlords need to be aware of is the distinction between rental property repairs and improvements. Work done on a rental property is generally classified as either a repair or an improvement. While it’s not always easy to tell the difference, it’s necessary to do so because repairs and improvements are treated differently on your annual tax return.
To help you correctly classify repairs on your tax return, here’s a look at the difference between repairs and improvements and how you treat each at tax time.
Why the Difference Between Repairs & Improvements Matters for Landlords
Even though it’s often hard to figure out whether maintenance should be classified as a repair or improvement, it’s really important to do so when you’re filing your taxes. Here’s why: the full cost of repairs can be deducted in the tax year that they’re incurred, whereas improvements must be capitalized and depreciated according to a set depreciation schedule. While the schedule varies based on asset type, rental properties are usually depreciated over 27.5 years.
This means that if you made $5,000 in repairs to your rental property in 2022, you could deduct a full $5,000 of expenses from your rental income. In contrast, if you made $5,000 in capital improvements, you would need to depreciate that. If you’re using a 27.5-year schedule, that would mean you could deduct $182 for those improvements in 2022.
How to Tell the Difference Between Repairs & Improvements
While it can be tricky to tell the difference between repairs and improvements, being familiar with the definition and some examples of each can help to make sure you classify work correctly.
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As a general rule, a repair is something that keeps the property operating as it should be. A repair keeps the property in ordinary, operating condition, but does not add significant value or extend the life of the property. It simply maintains the property’s current condition.
Examples of repairs include:
- Repairing a leak in the roof
- Refinishing floors
- Painting a room
- Replacing a broken window
- Repairing a leaky faucet
Capital improvements are those projects that extend the “useful life” of the property. The IRS classifies something as an improvement when the property undergoes “betterment, adaption or restoration.”
The key to thinking about improvements is focusing on whether the work added value to the property or extended the life of the property.
Examples of capital improvements include:
- New windows for the entire property
- New HVAC system
- Replacing the roof
- An addition
- A new deck or inground pool
- New carpet or flooring
- Renovating the kitchen or bathrooms
Deducting Repairs & Improvements
What this means for Landlords is that when doing taxes, you need to:
- Determine whether maintenance works and expenses should be classified as repairs or improvements.
- Deduct accordingly, either:
a. Deducting the entire expense of repairs in the tax year when the work was completed; or
b. Capitalizing and depreciating improvement expenses according to the applicable depreciation schedule, which is generally 27.5 years for rental properties.
While this should help you properly classify repairs and expenses, we recommend that investors consult with a tax expert to make sure they’re taking advantage of all applicable deductions and complying with all tax laws.
You can also visit ezLandlordforms.com for more Landlord advice, state-specific Landlord forms, and live chat support for Landlords.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.