Once your property is in service, you’ll need to determine whether each repair and maintenance expense you incur should be classified as a regular expense or a capital improvement that must be capitalized and depreciated. Get tax-ready financials for your rental properties > Capital improvements vs repairs, and maintenance expenses Itemized invoices are also helpful in determining whether expenses might qualify under one of the safe harbors mentioned in the next section or for 100% bonus depreciation. Replacing an entire roof, floor, bathroom, kitchen, or plumbing systemĮxamples of renovation items you want to do after you place the property in service include:Īs a best practice, you’ll want to get in the habit of itemizing your invoices so that you, or your accountant, can more easily categorize these items as repair and maintenance expenses or capital improvements.Examples of renovation items you want to complete before you place the property in service:
Note that some renovation costs will always be considered capital improvements regardless of whether or not a property has already been placed in service (e.g. Other start up costs such as appliances, which are normally considered capital improvements, become deductible in the current year under the de minimis safe harbor provision of the tax code. Once the property is in service you can finish the renovation and deduct some of the costs as repair and maintenance expenses in the current year. In other words, if the property is habitable and no longer dangerous, it’s probably also ready for lease. As mentioned above, the definition of ready for lease will be determined by the building codes in your locality, but is typically when sheetrock is on the walls and the flooring is finished. The way to successfully manage this distinction from a tax perspective is to complete the minimum amount of work necessary to get the property ready for lease, then immediately advertise it for rent. Regular repair and maintenance expenses are fully deductible in the year incurred and are not subject to depreciation recapture. The key point here is that costs that are capitalized and then depreciated are recovered over several years and then are subject to depreciation recapture (a 25% tax when you sell the property). Any renovation costs incurred before you place the property in service must be capitalized and depreciated, generally over 27.5 years, regardless of whether or not they are actual capital improvements or simply repair and maintenance expenses. Rental property investors will often purchase a property vacant and in need of significant renovations before it’s ready to rent. The rental property is considered available for use once it’s advertised for rent.
Generally, your rental is ready for use when the city or locality of your rental property will conservatively issue a Certificate of Occupancy. To place a property into service, you must meet two requirements: (1) the property must be ready for use and (2) the property must be available for use. If there’s no existing tenant, then the property is assumed to be not yet in service. When you first purchase a rental property it will be considered “placed in service” on day one if there’s an existing tenant in the property. Let’s dive into some nitty gritty real estate tax strategies that will ensure you’re paying as little tax on your rental income as possible.
Now it’s time to delve into some more advanced strategies available to investors. In fact, we even teamed up with the experts over at The Real Estate CPA to write a comprehensive tax guide for real estate investors. We’ve covered the basics of taxes for real estate investing over the past month, including deductions, 1031 exchanges, business travel, and more. Makes tax time a breeze for rental investors Learn More
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