As any accountant will tell you, the biggest tax savings don’t come from loopholes you find April 14th, but from focused, planned action you take in the months, if not years, leading up to a tax period. And this is doubly true when looking for buy and hold property tax benefits.
While most people owning a rental property know that “repairs” are tax-deductible, such as replacing a cracked foundation or patching a leaky roof, not everyone owning a buy and hold property knows that “improvements” can be depreciated as well. Or if they do know that one of the huge tax benefits of passive income investing is the ability to write off upgrades, they don’t know which upgrades they should focus on (and which ones will significantly boost the value of a rental property).
So whether your exit strategy is to simply reduce your tax liability or increase the value of your buy and hold property, here are six upgrades you might want to add to your investing to-do list.
Tax Deductible Upgrades On Your Buy And Hold Property
1. Heating & Air Conditioning
No tenant wants to be in a rental property that has inadequate heating and A/C, and depending on the climate –- and age of the existing HVAC system –- this “improvement” might border on a requirement.
But there’s no doubt that having modern, functional HVAC amenities will not only attract tenants, but also reduce vacancy rates. The most common tax-deductible improvements in this area include:
- Central A/C
- Heating system
- Duct work
- Filtration system
Again, the precise improvements you make will depend on a variety of factors. However, adding sizzle features in this area –- such as a humidifier in a dry climate or a filtration system to remove unwanted allergens –- can be a major boon to owning a buy and hold property.
2. Property Additions
This might be the most attractive, and profitable, item on this list of the tax benefits of real estate investing: make major structural improvements that increase the amount of usable space, as well as modernize outdated areas of your rental properties.
Addition improvements would include:
- Master bedroom
- Bathroom – Money spent improving a bathroom, especially the master bathroom, is hardly ever wasted
- Deck/Patio – One of the most eye-catching improvements you can make
- Garage – If parking is an issue, this can be a deal-cincher
The key to making improvements in this area is to focus on function, not current style. Keep your bedroom and bathroom improvements modern and neutral, and let your tenants decorate their patios and deck however they like. Just give them extra areas to entertain and enjoy their time, and you’ll often be rewarded with a low vacancy rate.
3. Lawn & Grounds
There is a popular saying: you have seven seconds to make a first impression. When it comes to your buy and hold property, that means making sure your rental looks clean and modern from the get-go.
Improvements in this area can range from simple (and somewhat low-budget) to extensive and costly. But some of the best tax-deductible improvements you can make include:
- Retaining wall
- Sprinkler system
- Swimming pool
This will, of course, depend on the current condition of your property, and what the market expectations are. If you’re in the drought region of Arizona, you may not need a sprinkler system. If you’re in the Northeast, a swimming pool may not be a practical option.
By making small, powerful tweaks to the exterior of your property, you’ll be adding serious sizzle (not to mention profit potential) to your buy and hold listing.
4. Interior Improvements
The IRS calls these “interior improvements,” but they refer mostly to common-room investments such as:
- Kitchen upgrades
- Built-in appliances
- Modern lighting
Improvements in this area will rest heavily on the expected ROI. A new kitchen and hardwood floor can be expensive, no doubt, but if the cash flow return is boosted significantly, based on your projections, it can be a worthy investment.
But you don’t have to break the budget to see a real return with these types of improvements. Adding built-in appliances –- such as an overhead microwave or lighting that doesn’t look like it came from the 80s –- can be quite eye-catching to would-be tenants. (And reduce the amount of time your rental property sits idle.)
5. Wiring & Electronics
This is one area many investors overlook, perhaps because it doesn’t directly affect the infrastructure of a property. But by upgrading the electronics of your property, and giving your tenants the latest technological amenities, you can make the perceived value of your property skyrocket.
Electronic upgrades of this variety would include:
- Satellite dish & Internet (especially in rural areas)
- Security system
- General wiring improvements
- SMART home upgrades (Such as home automation, remote control, audio/video distribution)
The cost for these type of improvements can vary greatly, by location and desired upgrade. A good rule-of-thumb is to match the “right bait for the right fish.”
That university college student rental will benefit from a powerful Internet solution and integrated audio system. The average downtown loft might require some SMART upgrades to stand out in a crowded market.
A True Win-Win Situation
The reason why buy and hold property upgrades are so powerful is that they allow you to boost the value of your property (both perceived and actual). At the same time, they represent an expense you can use to reduce your tax bill, through a process called depreciation.
And while not every rental property upgrade on this list will match your budget, or market, they can be a worthy addition to your investing toolkit. With so few true “win-win” scenarios in life, it’s good to take advantage of them when they come around.