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Can I deduct expenses of renovations and maintenance/repairs on the rental property?

After 2 years of renting our property, we made some renovations and repairs/maintenance work while we were living there at the end of 2021 for 3 months because the people who rented did some damages. Can I deduct the expenses for renovation and maintenance as an expense of the rental property in the 2021 tax file?

 

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Accepted Solutions
AnnetteB6
Expert Alumni

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

If you have converted the rental property to personal use by using it as your main residence, then the costs incurred to repair and renovate the property are personal expenses and cannot be deducted as a rental expense.

 

If you used the rental property for personal purposes, but it is still advertised and available for rent while the repairs were done, then you would report your personal use days as part of the rental income and expenses section of your return and claim the repair costs as a rental expense.  Major renovations would need to be depreciated as a component of the property instead of being deducted as an expense.  

 

 

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11 Replies
AnnetteB6
Expert Alumni

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

If you have converted the rental property to personal use by using it as your main residence, then the costs incurred to repair and renovate the property are personal expenses and cannot be deducted as a rental expense.

 

If you used the rental property for personal purposes, but it is still advertised and available for rent while the repairs were done, then you would report your personal use days as part of the rental income and expenses section of your return and claim the repair costs as a rental expense.  Major renovations would need to be depreciated as a component of the property instead of being deducted as an expense.  

 

 

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Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thank you for taking the time to answer my question. Still, it isn't advertised (I didn't know to keep it advertised), but we will rent it again in March or April when the repairs are finished. In this case, could we report part of the related expenses and claim the repair costs as rental expenses? 

Carl
Level 15

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

After 2 years of renting our property, we made some renovations and repairs/maintenance work while we were living there at the end of 2021 for 3 months because the people who rented did some damages. we will rent it again in March or April when the repairs are finished.

If your primary purpose for living in the property was to work on it and complete repairs and renovations, with the intent of renting it out again once all the work is complete, and you did "NOT" change your primary residence, then the property remains classified as a rental property and you do "NOT" have any personal use days. So if there was no pleasure use for one single day while you were in the property, you do NOT have any personal use days.

Now, you need to clarify what is a repair expense, and maintenance expense, and a renovation. Renovations, commonly referred to as property improvements, are treated differently from repairs and expenses.  Here's a definition of each, with guidance on where to enter them.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
Restoration:
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation:
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

 

Expenses for these types of costs are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria need to be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. For example, property classified as Residential Rental Real Estate can not use the safe harbor election. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent for the very first time are not deductible. Any of these expenses you incurred are deductible, since you're not preparing it for rent for the very first time.

Repair

Those expenses incurred to return the property or it's assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent for the very first time are not deductible. Any of these expenses you incurred are deductible, since you're not preparing it for rent for the very first time.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

As long as you are attempting to rent it and it is available for rent, you can record all of the repair expenses. 

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thank you for taking the time to answer my question. It seems like I can't use the maintenance/renovation costs as an expense for the rental property on the 2021 tax return. I rented out my house which I originally purchased as my primary residence. But, in 2021 I was lived in a different state and changed my address to that state for a few months.   

Carl
Level 15

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

But, in 2021 I was lived in a different state and changed my address to that state for a few months.

What do you mean by "changed my address"? Basically, if you changed your residency, that matters. Not only for the rental, but possibly for tax purposes too.

I'm now wondering if you moved yourself and your family into the rental during your renovation period and did other things that would constitute a change of residency, or possibly classify the property as your "second home" for that period of time. If so, that changes things dramatically.

I'm not trying to pry into personal business here, but if it's not to much trouble, could you explain in more detail? I just want to help you ensure that in case of an audit (not likely, but not impossible) you don't end up on the short end of the stick with the IRS.

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thank you for taking the time to answer my questions.

In July 2019 we moved to South Korea  (job with the U.S. Government) and started to rent out our house in CO. The lease expired in Sept 2021, so until this time we couldn't move back into our home.

In Feb 2021 we moved to WA from Korea and rented out an apartment. In Sep 2021, we moved back to our home in CO from WA. When we moved back into our home, there was a lot of damage which costs us about $4882 to repair which included a minor renovation. We will rent out our house again in March or April in 2022 when the work is finished. In this case, can I claim expenses for renovations and maintenance/repairs of my rental property? 

Carl
Level 15

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thanks for clarifying things a bit better. Your reference to "we" moved into "our" home indicates that it became your primary residence upon your move in. Here's how that affects things.

Technically, this house should probably be converted back to personal use. But since you will be vacating it again in less than a year after occupying it, I really see no need. Besides, once you convert it to personal use, when you convert it back to a rental again, everything starts over with depreciation, using a new cost basis that is determined by subtracting all the depreciation already taken, from the old cost basis. So just leave it classified as a rental and save yourself the drudgery of extra paperwork and math.

 

 - Property improvements will still be applied. But you will not enter/claim those property improvements until the tax year you actually place the asset in service. Since the renovation was completed in 2021 while you were living there, it's never placed "in service" as a rental asset in 2021. So you won't enter it on your 2021 tax return. You'll enter it on your 2022 tax return next year, in the Assets/Depreciation section with an "in service" date that has to be at least one day after you and the family vacate the property. Technically, the in service date will be the first day the property is "available for rent". Typically, that's the day you put the FOR RENT sign in the front yard.

As for the maintenance and repair costs incurred while you are living there, they're just flat out not deductible. As an example, things like yard care, power washing the driveway, replacing that broken door knob and hinge on the back door, yearly maintenance of the central air cost of electric, water, and other utilities are just flat out not deductible in you incurred the expense during the period of time you are living in the property.

Additionally, assuming you will leave the property classified as a rental (which is what I recommend), you will need to indicate that the property was not rented the entire year. Then you'll be asked for days rented, and days of personal use. The total of those two numbers do not have to total 365 (days in the year). The total can be less than 365. But it can't be more. The days the property may have sat empty before you moved in, don't count against you. But the days you lived in the property do count against you for depreciation. So your depreciation for 2021 will be quite a bit lower than it was in 2020.

 

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thank you very much for your answer and advice. I really appreciate your help. 

Carl
Level 15

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Just keep in mind you'll have the same scenario on your 2022 taxes next year, since you lived in it in 2022 and therefore do have personal use days.

 

Can I deduct expenses of renovations and maintenance/repairs on the rental property?

Thank you. 👍

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