Summer-Time Rental Improvements Can Save You Money at Tax Time

Before you get excited, there are no tax savings from improvements you make to a property you rent.

You: But the title­—

Sorry, but that refers to rental properties you own.

You: Now how could I possibly own the property if I am renting it?

If you’re the landlord.

You: I knew that.

There are many tax benefits available to those who own rental properties.  As an important example, most modifications you make to your rental property result in tax savings of one kind or another.

You: How so?

It depends.

You: On?

Whether the changes you make to the property are considered improvements or repairs.  Whereas repairs may be immediately tax deductible, improvements must be depreciated over time.

You: What’s the difference?

What’s the difference between improvements and repairs? Or what’s the difference between an immediate tax deduction and depreciation over time?

You: Actually, both.

Fair enough.

Home Improvements

Home Improvements

Improvements vs. Repairs

Like they sound, repairs don’t make any permanent changes to the property; they simply put the property back to a previous state.  Said another way, repairs don’t add to the value of the rental property.  Consequently, expenses such as the cost for a plumber to go fix a toilet or for an electrician to replace a circuit are textbook examples of repairs.  But, so too, are far more expensive costs, like the expense of painting your property or fixing up part of a roof where it might be leaking (again).

On the other hand, expenses you incur which increase the life of the property or add value to it are considered improvements.   Replacing the whole roof, for example, is an improvement. Although you wouldn’t necessarily think of a new roof as immediately increasing the value of the property, it certainly increases the expected useful life of it and consequently is considered an improvement.  Obviously, additions and similar major upgrades are considered improvements as well.

Tax Deduction vs. Depreciation

Repair expenses may be immediately tax deductible from rental income. This means you’ll reduce your taxable income from the rent you collect by the exact amount of the repair expense.  On the other hand, costs for improvements must be depreciated or divided over their useful life.  As a result, improvements add to the amount you can already depreciate related to your rental property on an annual basis.

You: What does that mean?

Say you decide to add a new piece of furniture to the property. Furniture typically has a five-year life, at least according to the IRS (that you and your tenants might have completely different opinions is not relevant).   If the price of the furniture is $500, you can depreciate $100 a year for five years.  Since a couch is not a repair, you cannot immediately expense it.

Between improvements and repairs, there’s plenty of tax savings opportunities if you’re in the mood to get to work (and to spending) this summer.

Michael Rubin

Author of the bestseller Beyond Paycheck to Paycheck, and the upcoming The Savings Solution, Michael B. Rubin is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER professional. In addition to his experience providing sophisticated financial advice to affluent clients, Michael has been a key source of information for over a decade to countless others. He speaks passionately about and provides guidance on virtually all personal financial planning topics. Michael has appeared in various media, including radio and TV stations across the country, plus national media such as CNN Money.com, latimes.com, The Wall Street Journal, SmartMoney.com, Chicago Tribune, Financial Advisor Magazine, and Investment News. Prior to founding Total Candor LLC, Michael worked in the personal financial services practices of two of the former "Big Six" accounting firms. Subsequently working for several years as a new venture executive for Toys "R" Us, Inc., he made sure that he never actually grew up. He holds an undergraduate business degree from the Ross School of Business at the University of Michigan and an MBA from the Kellogg School of Management at Northwestern University. Michael lives in New Hampshire with his wife and children.

Comments (1) Leave your comment

  1. I am new at the rental business. I bought a home to rent to my son!!Am I still allowed to consider it a rental if a family member is living there and paying rent??

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