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Repairs and maintenance ensure that your rental property is habitable for your tenants. As a landlord, you should supervise matters such as fixing a defective AC unit or replacing a broken window.
If you want to take advantage of tax deductions, you can include the expenses of regular maintenance and repair in your tax deduction claims. However, many landlords deliberately or indeliberately fail to distinguish between regular maintenance and repair versus capital improvements when filing their tax returns.
Doing such can cause a problem with the Internal Revenue Service (IRS). So. make sure that you understand the difference between regular maintenance and repair versus capital improvements to your rental property if you want your tax payments to get deducted.
Maintenance, Repairs, and Improvements: Defined
Let’s now define the terms in question to find their difference. So, here are the definitions of maintenance, repairs, and capital improvements.
What is Property Maintenance?
Maintenance means any work on your rental property to prevent damage or any issues that can make the property uninhabitable. It focuses on keeping the rental property in its original condition and function. Rental property maintenance is more on standard, preventative work.
Examples of maintenance work are replacing and substituting property components or devices that are no longer working property or on the verge of malfunction. Routine servicing of an AC unit is an example of maintenance.
What are Property Repairs?
If there’s any damage in your rental property that needs to be fixed, you need to repair it. For example, if rainwater passess through the roof because there’s a hole in it, you need to seal it to prevent water from leaking.
So, when there’s damage, it needs to be repaired. The goal is to bring the property component back to the condition before it incurred damage. But you need to keep in mind that there’s some damage that can’t be repaired. The solution is to replace it.
Sometimes a repair job is classified as a capital improvement, which prompts the IRS to treat it differently from other repair works when you’re making tax deductions.
What are Capital Improvements?
A rental property owner who spends money to make his rental property better than the state it was before is making a capital improvement. Such works aim to extend the property's expected life and boost its value. Capital improvements can also increase the capability of a rental property to generate income.
Examples of capital improvements include extensions, additions, renovations, and remodeling. Replacements and repairs can also fall under the category of capital improvements.
The best way to differentiate capital improvements from maintenance and repairs is to look at whether the work raises the value and income-generating capacity of a rental property. If yes, it’s a capital improvement. Fixing extensive damage on a property can also end up being a capital improvement because a simple repair might not be enough to solve the problem.
Different Types of Capital Improvements
The IRS categorizes capital improvements or expenditures to reduce confusion when making tax deductions. Below, we’re going to define each type of capital improvement.
- Improvements. This job means changing the look or character of a property to adapt it for a new use. Any money spent in improving the property’s condition must be capitalized.
- Betterments. Any job that aims to increase the quality, strength, and capacity of a rental property is referred to as betterment. Repairing a pre-existing defect or expanding a property also fall under this type of capital improvement.
- Restoration. Any work that aims to rebuild a rental property to its original condition after extensive damage is called restoration. Replacing a major structural part of the rental property may also fall under this category.
Tax Implications of Improvements vs. Repairs
It’s crucial to define repairs, maintenance, and capital improvements because it enables you to make your tax deduction claims properly. Rental property owners can deduct 100% of the expenses of maintenance and repairs within a year since the work began.
However, for capital improvements, they should be depreciated over the years. It means rental property owners can’t make one-off tax deductions. You can hire a certified accountant with experience dealing with tax laws and real estate investments to learn how depreciation works and maximize your tax deductions.
Make sure you keep your invoices and receipts of all maintenance, repairs, and improvements to avoid difficulties when the IRS audits your tax deduction claims.
Final Thoughts
Save money by knowing how to make a tax deduction from your rental property’s maintenance and repair expenses. See to it that you know how to differentiate between maintenance, repairs, and capital improvements because you might cause problems in the IRS if you make incorrect tax deduction claims. Make sure to keep all the paperwork related to your expenses.
