How do I handle capital improvements and depreciation for my rental?
Capital improvements that add to the value of your rental property, prolong its life, or adapt it to new uses must be depreciated over a period of time rather than deducted as a current-year expense. This would include things like:
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
In other words, if you spent $8,000 on a new roof last year, the IRS won't let you deduct the entire $8,000 from last year's rental income. Instead, the $8,000 must be depreciated, which means you deduct it over a period of time instead of all at once.
To enter your rental improvements, simply follow the directions to enter your rental income and expenses. At some point you'll come across the Here's [your property's] rental property info screen. Under Expenses / Assets (Depreciation), select Add expense or asset and follow the onscreen instructions. We'll figure out which depreciation method works best in your favor.
Note: Although it doesn't seem logical, refinance fees and mortgage points are also entered in the Expenses / Assets (Depreciation) section. The IRS considers these amortizable intangibles and accounting rules dictate that those are to be depreciated instead of deducted as an expense.
