As a landlord, it’s essential to know the difference between repairs to your rental property and improvements to the property, because the distinction can have a big impact on your taxes. Repair costs can be deducted in their entirety that same tax year, while improvement costs must be deducted over the course of several years. The specific number of years depends on the type of improvement.
A repair is a basic fix to keep something in working order. Sometimes these are called operating expenses. Repairs can include buying replacement parts for appliances, patching a roof or worn carpet, or even something as simple as unclogging a drain.
Repairs are not big-ticket items, and they are not upgrades. Rather, repairs prolong the life of the original appliance, structure, or amenity.
As stated above, the full cost of a repair in a rental property can be written off as a tax deduction. For this reason, experienced landlords recommend keeping track of your expenses and saving receipts. Some even use a digital filing system with categories to avoid the “receipts-in-a-shoebox” method of organization.
If you’re keeping track of your receipts in Tellus, it’s easy to sort expenses by category and see how much you spent on repairs at any given time.
Improvements are considered upgrades. Unlike repairs, where the life of an appliance or structure is prolonged, an improvement makes a full-out replacement. Improvements are usually more expensive, and include items such as new kitchen appliances, a bathroom remodel, a roof replacement, or a new water heater.
Since improvements have the potential to add significant value to the home for years to come, tax deductions are not claimed all at once. Instead, each improvement’s value is recuperated over the course of the improvement’s useful lifetime. This process is known as depreciation.
For example, if you put in a new carpet, the IRS claims a useful life of 5 years (assuming the carpet is tacked down, as most carpets are these days, as opposed to glued down). If you spent $5000 on the carpet, you would be able to claim ⅕ of that ($1000) as a deduction each year for five years.
The IRS sets specific timeframes for depreciation, which affects how much you can deduct for improvements each year. The following table shows several examples. Note that the land never depreciates, since land can always be built on again.
|Carpet (tacked down)||5 years|
|Office furniture||7 years|
|Carpet (glued down)||27.5 years|
|Residential buildings||27.5 years|
|Commercial buildings||27.5 years|
Repairs vs. Improvements
To better understand this important distinction, here are some examples of expenses that would be considered repairs vs. improvements:
|Patching worn carpet||Installing new carpet|
|Patching the roof||Replacing the roof|
|Tightening a loose doorknob||Replacing the door|
|Fixing broken cabinets||Remodeling the kitchen|
|Replacing an electric burner||Replacing the stove|
|Replacing a valve||Installing new pipes|
Repairs prolong the life of an amenity while improvements upgrade it and increase the value of the home. Repairs can be deducted in their full amount each year, but improvements must follow a depreciation schedule set by the IRS. Understanding the difference will help your taxes be much more straightforward!