Owners of residential investment property often spend money on repairs or renovations. These expenses can be written off on your taxes, but the rules vary depending on the nature of the work. Here’s what you need to know about how the Internal Revenue Service treats expenses for repairs and renovations.
Repairs and renovations are two different things
The IRS considers actions that are intended to fix something broken to be repaired. The key is whether your action helps keep your property “in an ordinarily efficient operating condition.” Expenses for renovation, on the other hand, improve your property and increase its value. If you replace, add or upgrade anything that increases the property’s value or extends its life, particularly if a repair alone would have been sufficient, the IRS deems your expense to have been for renovation.
As an example, say a baseball gets hit through your rental house’s window. Replacing the glass is a repair. Having the entire window and perhaps others replaced is considered a renovation. Likewise, if you replace a leaking showerhead, that’s a repair. If the leak prompts you to replace all the plumbing hardware in the bathroom, that’s a renovation.
How taxes are treated for each
A repair is treated as a cost of business for a residential investment property. Expenses for repairs can be fully deducted in the year you make them. The same goes for maintenance costs, such as having an HVAC professional check out your system and clean condenser coils.
Renovations to a residential investment property, however, are considered capital improvements. That means their cost must be depreciated over 27.5 years. The depreciation period for renovations starts on the later of the date the improvement was put into service, or the property was put into service as a rental property.
Related considerations
Whether the projects you undertake are repairs or renovations, it’s important to keep good records, so you know what you’ve spent.
Remember that tax laws often change. If you own residential property as an investment, it’s a good idea to work with a tax professional who will be aware of the IRS’s current rules and keep you from running afoul of them.
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