No one enjoys paying taxes. Being a landlord, however, can be a blessing at tax time. Why? Because as a landlord, the IRS permits a wide variety of tax write-offs and credits that may increase your wealth. Using perfectly legal tax breaks is one way for rental property owners to decrease their expenses.
Two of the most useful tax deductions for landlords are repairs and improvements. But what is the difference and why are they important? This is essential to understand the difference between the two because they are handled differently at tax time.
Repairs
Repairs are usually “one-off fixes” that keep the property in good condition and make it livable. The IRS in its 1040 Schedule E instructions makes this clear: “Repairs in most cases do not add significant value to the property or extend its life.” Examples of repairs would include fixing a broken lock or electrical outlet or replacing a non-ringing doorbell or broken faucet. The cost of repairs needed to maintain rental property can be deducted each tax year against the property’s income for that year.
Improvements
Improvements, on the other hand, include anything that increases the overall value of the property or extends its life in some way. A good way to remember this is if you are adding a new item, or upgrading an existing item, then it’s usually considered an improvement. Examples of improvements include bathroom renovation, upgrading the tiling on a roof, or building an addition to the property.
For tax purposes, improvements are categorized as capital expenses. Because they extend value over a period of years, improvements must be capitalized and depreciated over a number of years.
In summary, both repairs and improvement can be beneficial to landlords at tax time. In most cases, but not always, it is relatively straightforward to distinguish between the two. And that is important because the IRS handles them differently. For additional help with real-estate-related taxes, contact Abbo Tax for your tax preparation needs.
