Tax Deductions for Property Repairs
As a landlord, you may be eligible for various tax deductions, including those for maintenance and repair expenses on your rental properties. If you’re new to the role or have recently incurred significant repair costs, this is what you need to know about tax deduction for property repairs and maintenance.
Are Property Repairs Tax Deductible?
Yes, landlords can claim the full cost of repairs on a rental property as a tax deduction, which reduces your taxable income. This means that the amount you can save on taxes is equivalent to the cost of the repair multiplied by your tax rate. However, not all changes or updates made to a property are considered repairs.
Repairs vs Improvements
Repairs and maintenance expenses on rental properties are generally tax-deductible in the year they are incurred, as long as they are necessary to maintain the property’s normal operating condition. However, expenses incurred to improve the value of the property, such as upgrades or renovations, are not fully deductible in the year incurred. Instead, the cost of these improvements must be recovered through depreciation over the expected life of the property.
It’s important to note that for a repair expense to be deductible, it should be a reasonable amount based on the nature of the repair. Examples of such repairs would be fixing a refrigerator or a roof, which would typically cost a few hundred or a few thousand dollars respectively.
How Do You Differentiate Between a Repair and an Improvement?
Repairs are defined as replacements or updates made to restore an item to usable condition without increasing the value of the property. Some examples of repairs that would be tax deductible include:
- Repairing a leaking dishwasher
- Refinishing a hardwood floor
- Replacing a moldy air vent
- Replacing a cracked floor tile
- Snaking a clogged sewer line
- Repairing a part of the roof
- Replacing a cracked or broken window
Improvements are typically more costly than repairs and will increase the value of a property. These can include:
- Adding a dishwasher to a kitchen
- Upgrading to stainless steel appliances
- Replacing laminate flooring with hardwood flooring
- Replacing the entire roof
- Adding a deck
Of course, the amount of damage on the item or property can differentiate between a repair and an improvement. Typically, roof repairs are small and limited to one area. However, if a tree falls on a property and damages the entire roof, a full roof replacement could be considered a repair.
Tips for Deducting Repairs
If you want to deduct property repairs from your taxes, keep these tips in mind:
- To claim a repair expense as a tax deduction in a single tax year, it is important to ensure that it meets the definition of maintenance or repair. This means that the expense should be necessary, useful, and reasonable in cost and that it restores something to its previous condition, rather than adding value to the property. It is essential to note that repairs are different from improvements, which are not fully deductible in the year incurred.
- Keep records: Maintaining detailed records is crucial when claiming repairs and maintenance expenses as tax deductions. This is because, in case of an audit, you will need to provide proof of these expenses. It is important to keep receipts for any materials purchased, invoices for repairs done by contractors, and any requests from tenants for repairs. These records will serve as evidence that the repairs were necessary.
- Document with photographs: Taking photographs of the repairs can provide visual evidence of the work done, and confirm that no upgrades or improvements were made that would not qualify for a tax deduction. It can serve as a valuable proof in case of an audit.
- Don’t overlook the benefits of making improvements: While repairs can be fully deducted on your taxes, making improvements to your rental property may increase its value and, in turn, generate higher rental income. It is important to weigh the potential tax savings from repairs against the potential long-term income from improvements.