Your rental property needed a facelift. So you replaced the roof, fixed the windows, and replaced some fixtures. How you report those costs can make a big difference in your taxable rental income this year.
The IRS defines "improvements" as additions that add to the value of your rental property, prolong its life, or adapt it to a new use. In most cases, you are working on the structure and components of the building.
Examples of improvements are:
- Remodels and room additions (including decks and porches)
- New or upgraded landscaping, irrigation, sprinkler system
- Hardscape such as pavement, block or retaining wall, patio
- Fencing
- Swimming pool, spa
- Storm windows, doors
- New roof
- Central vacuum or security system
- Upgraded wiring, plumbing, duct work
- Central heating, AC, humidifier
- New furnace, water heater
- Filtration, soft-water, or septic system
- Built-in appliances
- New flooring or wall-to-wall carpeting
- Upgraded insulation
- Satellite dish
You'll notice that nearly all these items have a long lifespan and aren't generally replaced very often.
So, the $8,000 you spent on that new roof? The IRS won't let you deduct the entire $8,000 from one year's rental income. Instead, the $8,000 is "capitalized" (recorded as a capital asset) and must be depreciated, which means you deduct it over a period of time (the useful life) instead of all at once.
The IRS sets the useful life for nearly all assets, based on industry standards. For instance, your rent house itself is depreciated over 27.5 years. And any improvements have the same recovery period (useful life).
On the other hand, anything that is not an improvement is a repair. Generally, these costs are to fix an existing feature rather than replacing it. For example, replacing a broken window or a leaky faucet. These costs are rental expenses that are deducted for the year of the expense.
Some items fall in a gray area - carpeting, for example. If you install new carpet in the entire rent house, you must capitalize that cost. But if you merely replace carpet in a few rooms, you may deduct that as an expense.
The IRS has issued lengthy regulations explaining how to tell the difference between repairs and improvements. These rules have been published here:
Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property
Have you made improvements to your Rental Property? How did you know if they should be depreciated or expensed? Share your story below!
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