- It is important to know the difference between rental property repairs vs improvements when filing your taxes.
- Be sure to keep itemized receipts for each and every repair or improvement you make, to make tax filing season much easier.
- Get to know how to fix the most common rental property repairs, and when to call in the help of a professional.
As a landlord, you most likely field rental property repairs on a regular basis, and you may be wondering which of these you can claim on your taxes, if any. Most rental property repairs are tax deductible, but it is important to know the key difference between rental property repairs vs improvements. Read on to find out why a repair that has added value to your property is technically not a repair, but an improvement, and which type is tax deductible.
[ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]
Rental Property Repairs Vs Improvements
Rental property repairs and improvements may sound like the same concept at first, but there are some key differences that should be of interest to a property owner. First and foremost, rental property repairs are tax deductible, while improvements are not. Repairs to a rental property are typically limited to one-time fixes that keep the property and items within the property in working and habitable condition. One may think of this as restoring something to its previous acceptable condition, instead of making any improvements to it. One may also generalize that repairs are typically inexpensive in comparison to improvements. Examples of common repairs include:
- Repairing a broken appliance
- Replacing cracked tiles
- Refinishing a warped door or window
- Replacing old fixtures
- Repairing plumbing
In the juxtaposition of repairs vs improvements to a rental property, the latter can be defined as any project that serves to add value to the property, or to help extend its life. Property improvements are a bit more complex to define than repairs, so here are some potential scenarios that are applicable:
- Making an addition to a property
- Making an upgrade to an existing item or area
- Repurposing an area for a different use
Because the above scenarios are ambiguous, the following provides some more specific examples of common property improvements:
- Adding a room
- Making bathroom or kitchen renovations
- Replacing roofing or plumbing entirely
- Adding a patio or deck
- Installing a smart system
In comparison to improvements, rental property repairs tax deductions tend to be easier to claim. Because the benefits from a repair are assumed to be reaped immediately and within the calendar year, the full expense of the repair can be claimed in the year that the project was completed. Improvements, on the other hand, are categorized as “capital expenses” by the Internal Revenue Service (IRS), and must be capitalized and depreciated over time. Because the value of an improvement is added to a property for years to come, and not as a one-time repair, it can only be deducted based on a depreciation schedule. Keeping a copy of all your receipts and invoices will make this task much easier. The following section provides definitions for other types of capital expenses that landlords should be aware of, in addition to the common improvement examples that were discussed above.
Other Capital Improvements
- Betterments: Projects that are considered to improve your property overall, such as addressing a pre-existing condition or defect issues, are considered “betterments.” Other examples include increasing the overall quality of the property, or expanding it in size.
- Restoration: Restorations are improvements made to a property in substantial amounts, such as renewing the structure of the property itself, or rebuilding it in such a way that it is nearly brand new. Rebuilding a property after loss, such as after a catastrophe or natural disaster are also considered restorations.
- Adaptation: When a landlord chooses to repurpose a given area of a property for a completely new use, then this type of project is categorized as an adaptation. Examples might include repurposing a unit as a community room or laundry room.
How To Fix The Most Common Rental Property Repairs
As a landlord without a property manager, it would be naive to think you would not have to respond to maintenance issues on a frequent basis. Many repairs can be done rather easily, and at an inexpensive cost. Many repair tutorials can be found online and on YouTube, if you are feeling particularly handy. However, you should become familiar with when to call in the help of a professional. The following provides guidelines on how to fix the most common rental property repairs, as well as whether or not you should call in for help.
- Broken or failing appliances: Some issues can be fixed as easily as ordering and replacing a factory part. However, if the source of the problem is difficult to identify, you can outsource the repair job to an appliance store.
- Leaks and water damage: Water leaks should be promptly addressed, as the resulting damage can lead to expensive and hazardly issues such as mold, mildew and erosion. Call your plumber as soon as any water leads are called to attention.
- Hot water loss: When tenants report not having any hot water, the issue most likely has to do with the water heater. Some issues can be addressed with an easy fix, while the help of a professional will be needed at times. Be sure to save up an emergency fund when appliances need to be replaced entirely.
- Pests, bugs and termites: Regardless of whether or not an infestation was at the fault of a tenant, be sure to call in a pest control company as soon as possible to identify the source and prevent spreading. After the pest issue has been put under control, be sure to educate your tenants on how to prevent infestations from happening in the future.
- Garbage disposal clogs: Issues with the garbage disposal may be one of the most common repairs landlords have to deal with, and it usually occurs because tenants are feeding food items down the drain. Disposals can be fixed relatively easily with some drain fluid, basic tools, or a motor replacement.
Rental property repairs are generally limited to one-time fixes that restore an item or aspect of a property back to its original, functioning condition. On the other hand, rental property improvements are categorized as capital expenditures that are considered to add value to the property in some manner. In the eyes of the IRS, there is a distinction between these two categories, and are thus deducted very differently when filing taxes. As such, landlords should be careful to keep itemized receipts on record for any type of repair or improvement they choose to make on their properties.
Do you have a good rule of thumb when discerning between a rental property repair and an improvement? Let us know in the section below: