Owners of rental properties have many different tax deductions available that can help offset their rental income and potentially lower their annual tax liability.
Depreciation is one of the most commonly taken tax deductions by property owners. Other key deductions include property taxes, mortgage interest, and expenses related to marketing, advertising, insurance, maintenance, and utilities.
Some homeowners may think that expenses incurred to maintain or remodel their properties are fully deductible, but there are some conditions that must be met in order to deduct certain maintenance or remodeling expenses on rental properties. Let’s take a closer look at these deductions to help you determine if you can deduct remodeling expenses for your rental property.
Rental properties undergo routine wear and tear, and property owners often have to dip into their pockets to pay for maintenance on their rentals. Repairs that keep rental properties in solid working order could include minor maintenance issues, such as replacing a broken window pane, having the dryer vent cleaned, or servicing the furnace. It could include seasonal maintenance, such as clearing leaves from the gutters or pruning back overgrown trees. It also could include more extensive maintenance projects such as repainting the property to get it ready for a new tenant, having mold removed, or patching a leaky section of the property’s roof.
According to the Internal Revenue Service, property owners can deduct all repair expenses incurred for routine maintenance of rental properties. Materials, supplies, or maintenance services that are used to keep the rental property in good operating condition are fully deductible.1 The repairs mentioned above and others like them are fully deductible maintenance expenses because they are necessary to keep the property in good working order.
It’s important that you keep all receipts and document expenditures for maintenance issues. These deductions can be used to offset your rental income for the tax year in which the expense was incurred.
Now let’s look at what kinds of expenses aren’t deductible and must be claimed through depreciation.
Popular remodeling projects such as adding a new bedroom or bathroom, complete kitchen makeover, new deck, or interior upgrades such as installing a new furnace or replacing outdated appliances can be important to bringing in and keeping tenants.
Unfortunately for property owners, these big-ticket expenditures aren’t qualified deductible maintenance expenses. As a property owner, you can only deduct routine maintenance costs. Capital improvements such as those just listed significantly improve the property and increase its value. You can begin recovering these costs by depreciating the expenses over the course of the asset’s useful life. For residential properties, that’s 27.5 years. For commercial properties, useful life is 39 years. So you can deduct 1/27.5th or 1/39th of the expense each year you hold the investment and it’s in service as a rental property.
Ordinary maintenance expenses, supplies, and services incurred in an effort to keep your rental property in good working condition are fully deductible in the year in which the expense was experienced. Remodeling expenses typically add value to the property and must be recovered over time through depreciation.
However, property owners who perform significant remodels or invest capital back into their properties may be able to recover some or all of their investment costs if they decide to sell and can get a higher price for their rental properties. Alternatively, property owners typically can charge higher monthly rents for modernized, upscale homes or investment properties that can help return some of their capital investment.
1Tips on Rental Real Estate Income, Deductions and Recordkeeping, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping