Tax Differences Between Home Repairs and Improvements On Rental Property

Tax Differences Between Home Repairs and Improvements On Rental PropertyWhenever you fix or replace something in a rental unit or building, you need to decide whether the expense is a repair or improvement, for tax purposes. Many landlords and rental property owners use a loophole by ‘repairing the house’, after a tenant has moved in. Then, they charge the tenant for the fix that has been mended. Hence, it’s important that you know the difference between home repairs and improvements.

What Is An Improvement?

Improvements are changes that you make to your property that adds value. Replacement of major systems or components of the property is also considered an improvement. Installing hardwood floors, fixing the water heaters, constructing a roof, are all examples of improvements.

What Is A Repair?

A repair is the maintenance that is required to keep the property in a working condition. They include painting, fixing a broken toilet, and replacing a faulty light switch. Suppose your tenant drills a wall through your wall, and you have to mend the wall, you can claim this to be a repair.

Deduction Of Improvements On Your Taxes

Improvements need to be depreciated, but the full value of it cannot be deducted on the same year the changes were made. This is because, improvements add value to the property in the subsequent years, and not only in the year that they have taken place.

Deduction Of Repairs On Your Taxes

A repair is a deductible expense for the year you pay for it. You can deduct the full cost from your taxes on the same year the repair was completed. One smart tip to properly deduct repairs is by documenting them. Typically, a repair arises due to the complaint of the tenant. Hence, document this complaint as this indicates that something had been damaged, and you had to fix it.

What If It Is A Bit Of Both?

What if you come across a repair that requires you to construct a part of the compound wall? Is this classified as a repair, or an improvement? In such cases, it is better to consult an expert.

An improvement adds value to your property, but the cost of a repair, can be immediately deducted from your taxes, leaving more money in your pocket. It is common for landlords to make tenants pay for the repair, and this usually comes out of the security deposit paid by the tenant. With the tenant already living there, the landlord can claim that the work is necessary to keep the tenant satisfied.

Living in a rental property cannot be as pleasant an experience as living in your own home. But be careful while claiming your taxes on home repairs and improvements!