Your rental property will inevitably require repairs and improvements. The changes you make can range from minor and inexpensive to major and costly. Luckily, repairs and improvements to your rental property can be deducted on your taxes, which might make them a little less of a hit to your bottom line.
That said, there’s a big difference between repairs and improvements when it comes to your taxes. While you can deduct repairs in full on the current year’s taxes, you’re not allowed to deduct the entire expense of an improvement immediately. You’ll have to do it slowly over time.
Repairs to Your Rental Property
Repairs are usually one-off fixes that keep your property in its current condition. While cost isn’t a factor in determining a repair or an improvement, repairs are often small and inexpensive. Common repairs might include basic maintenance such as unclogging a shower drain or patching a hole in the wall. According to the IRS, most repairs don’t add significant value to the property or extend the life of the property. The repair simply maintains the home in its current state.
Improvements to Your Rental Property
Anything that increases the value of your rental property or extends its life is considered a capital expense. As such, it must be capitalized and depreciated over multiple years. You’ll divide up the expenses over time and claim a small portion of those expenses in the current tax year and in future tax years. These improvements are usually more labor-intensive and expensive than repairs.
What to Know About Rental Property Tax Deductions
Improvements will add value to your property over several years and not just the current year. Therefore, you can’t deduct an entire kitchen renovation in a single year. Instead, you’ll claim incremental amounts over time, starting with the date of purchase or installation. Structural improvements, such as adding a room, are depreciable on a standard 39-year schedule. Non-structural improvements, such as installing wall-to-wall carpeting, depreciate over a 15-year accelerated schedule.
You can’t depreciate the cost of land since land doesn’t wear out, become obsolete, or get used up. However, you can depreciate certain land preparation costs that you might incur when preparing the land for leasing. For example, if you replace a section of the home and, in the process, you have to destroy bushes and trees that are right next to the building, those bushes and trees are closely associated with the building and therefore have a determinable useful life. In this case, you can depreciate them.
When you sell the property, you’ll need to know the costs of the improvements and how much each one has depreciated because you will have to pay taxes on the depreciated amount. Be sure to keep accurate records and receipts to help you during tax season.
According to the IRS, you are required to capitalize and depreciate these expenses:Improvements
If the change improved or restored your property or adapted your property to a new or different use, you’ll have to capitalize those expenses.
Betterments
Expenses that could result in the betterment of your property include fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Restoration
An expenditure is considered restoration if the damage you repaired resulted from a casualty event, returned the property to operable condition after falling into a state of disrepair, or replaced a major component or substantial structural part of the property that returned the property to “like new condition.” Restoration expenses need to be capitalized.
Adaptation
Expenses for adaption would include alterations to your property for a use that isn’t consistent with the intended use of the property. For example, converting a single-family home into multifamily units.
What Is a Repair vs. an Improvement?
Sometimes, it’s difficult to know if you are making a repair or an improvement. Here are some examples of repairs vs. improvements:
| Repair | Improvement |
|---|---|
| Fixing a cracked foundation | Adding a structural addition like a garage or new room |
| Repairing a broken air conditioner fan or replacing a clogged filter | Adding central air conditioning to your rental |
| Replacing a broken security camera | Installing a security system |
| Replacing a cracked tile in the kitchen | Installing new flooring |
| Patching a leaky roof | Replacing the entire roof |
| Replacing a broken cabinet door | Remodeling the kitchen |
Painting is a little tricky. Generally, painting between tenants is considered a repair. However, if the painting is part of a larger restoration project or an addition, then it becomes an improvement.
Rental Property Improvements and Depreciation
There are some items that are always capitalized and depreciated over multiple years. According to the IRS, these items include the following.
Heating and air conditioning:
- A heating system
- Central air conditioning
- A furnace
- Duct work
- A central humidifier
- A filtration system
Plumbing improvements:
- Septic system
- Water heater
- Soft water system
- Filtration system
Additions and interior improvements:
- Built-in appliances
- Kitchen modernization
- Flooring
- Wall-to-wall carpeting
Improvements to your lawn and grounds:
- Landscaping
- Driveway
- Walkway
- Fence
- Retaining wall
- Sprinkler system
- Swimming pool
Other items that must be capitalized and depreciated:
- Storm windows and doors
- New roof
- Central vacuum
- Wiring upgrades
- Satellite dish
- Security system
- Attic, wall, and floor insulation
Reasons to Improve Your Rental Property
You might wonder if it’s worth renovating a rental. Updating appliances and flooring can add value to your property, make it more attractive to renters, and will likely require less maintenance. Adding energy-efficient appliances or smart home features could save you money over time, as well.
Before making renovations, be sure to look at rent comps in your area. When you list your rental on Apartments.com, we provide you with free rent comparison reports. This valuable information gives you a clear understanding of the market so you can price your rental right, compare your property’s value to other similar properties, and review market conditions like the average days on the market and the average rent rates.
How to Depreciate Improvements on a Rental Property
The IRS provides guidelines on how to depreciate your rental property. When you capitalize a cost, you’ll recover that cost over a period of years through periodic deductions for amortization, depletion, or depreciation. You’ll add the cost to the basis of the property to which the improvements were made.
You’ll want to use IRS Form 4562 to determine your deduction for depreciation and amortization. Attach this form to your tax return for the year in which you are claiming the deduction.
Keep your taxes in mind and plan ahead before renovating your rental property. To make sure you are deducting expenses and capitalizing improvements properly, consider consulting with a tax advisor.
