Rental Repairs or Improvements: Choose The Deduction Carefully

Share Article

Landlords want to label every expense as a repair for the immediate tax deduction, but the IRS says No. As rental property consultants and tax experts, The Watson CPA Group discusses the ins and outs of rental deductions.

Jason Watson, EA, MBA

wall to wall carpet is typically less expensive than inside or outside paint, yet it is considered an improvement and not a repair.

A common question regarding rental deductions is repairs versus improvements. Repairs are expensed and deducted in the current tax year, whereas improvements are capitalized and depreciated over time. It is human nature to want a bird in the hand versus two in the bush, and therefore most rental property owners want to expense as much as they can to gain the immediate tax benefit.

In Publication 527 the IRS defines improvements as something that adds to the value of property, prolongs its useful life, or adapts it to new uses. Some examples from the publication include wall to wall carpet, new roof, additions and kitchen updates.

There is one caveat that taxpayers should be aware of- in the same list of examples, the IRS is quick to point out that work which does not add much to either the value or the life of the property, but rather keeps the property in good condition is considered a repair and not an improvement. A common example is paint, even if you completely paint the interior and exterior.

It is not a matter of cost- wall to wall carpet is typically less expensive than inside or outside paint, yet it is considered an improvement and not a repair.

There is also a lot of grey area. Tax professionals disagree on new carpet for one room- some argue improvement, and some argue repair. Other grey areas include a used appliance, replacing just deck railings, planting a new tree, among others.

HOA dues can also be problematic since some HOAs cover the costs of roofs and other items that are typically depreciated and not expensed. This is especially true for condominiums or cooperatives. Having said that, most tax professionals deduct 100% of all HOA dues unless there is a strong distinction of the funds.

There are several rental property expenses that landlords are allowed to deduct. There are obvious ones such as advertising costs, mortgage interest, utilities, repairs and depreciation. However vehicle expenses and home office deductions are often overlooked.

If a landlord travels to Home Depot to pick up a new faucet or go to WalMart to grab some window cleaner, a taxpayer can deduct those miles in conjunction with the ownership of the rental property. Yet if a landlord travels to Home Depot to update a kitchen, those miles become a part of the depreciable improvement and are not expensed. Home office deductions are can be tricky, and consultation with a tax professional is typically required.

The Watson CPA Group is a progressive tax consultation and preparation firm embracing internet technology to provide worldwide tax service from offices in Colorado Springs, Colorado USA. A secure online Client Portal allows remote taxpayers to exchange financial information, tax documents and tax returns saving valuable time and resources.

Since 1997, The Watson CPA Group prepares individual and corporate tax returns for a flat fee, and specializes in LLCs, small business taxes, pilot and flight attendant tax deductions, rental property owners and expat tax clients.

For more information visit http://www.watsoncpagroup.com.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Tina Watson, CPA, MBA
Follow us on
Visit website