Whenever you fix or replace something in a rental unit or building, you must decide whether the expense is a repair or an improvement for tax purposes. Many landlords and rental property owners use a loophole to ‘fix the house’, after the tenant has moved out. They then charge the tenant for the fix that has been repaired. Therefore, it is important that you know the difference between home repairs and home improvements.
What is an upgrade?
Improvements are changes you make to your property that add value. Replacement of major property systems or components is also considered an improvement. Installing hardwood floors, fixing water heaters, building a roof are all examples of improvements.
What is a repair?
A repair is maintenance that is required to keep the property in working order. They include painting, fixing a broken toilet, and replacing a faulty light switch. Suppose your tenant drills a hole through your wall and you have to repair the wall, you can claim that it is a repair.
Deduction of improvements on your taxes
Improvements must be depreciated, but the full value of the improvement cannot be deducted in the same year the changes were made. This is because improvements add value to the property in subsequent years, not just the year they are made.
Tax deduction for repairs
A repair is a deductible expense for the year you pay for it. You can deduct the full cost from your taxes the same year the repair is completed. A smart tip to correctly deduct repairs is to document them. Usually, a repair arises because of the tenant’s complaint. Therefore, please document this complaint, as it indicates that something was damaged and you had to repair it.
What if it’s a bit of both?
What if you come across a repair that requires you to build a part of the composite wall? Is this classified as a repair or an upgrade? 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. Since the tenant already lives 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 when claiming your home repair and improvement taxes!