As a real estate investor you want to maximize your tax benefits and write-offs, as well as avoid costly mistakes.
The IRS has very specific rules regarding which expenses can be fully deducted from your taxes at the time of billing, and which expenses need to be deducted over time. Here’s a quick overview of the difference between a tax deduction and a capitalized expense.
Rental Expenses Landlords May Deduct
There are some rental operation expenses that the IRS allows real estate investors to deduct in full at the time they are expensed on your property. These categories include:
- Property taxes
- HOA fees
- Property management fees
Rental Expenses Landlords May NOT Deduct in full
While there are many expenses you can deduct in full on your taxes, there are some items you as a landlord or property manager can’t deduct. These categories include items such as:
- New appliances
- New windows
- New roof
The rule of thumb: If the expense causes the property value to increase, it likely doesn’t qualify as expense that you can deduce in full - rather you must deduct the expense over time as a capitalized improvement.
Repairs vs. Improvements
The important tax rule landlords need to remember is that repairs are fully deductible at the time they are expensed, while improvements must be capitalized (or depreciated) over an extended period of time – potentially up to 27.5 years!
As you can imagine, this can be a grey area for many landlords and real estate investors. For example, if a toilet is broken and you need to replace the toilet, does that expense go under the “repairs” category or “improvements” category?
Some CPAs and real estate investors may choose to categorize an expense as a "repair", while others will expense the same service as an "improvement."
At Grace Property Management, we leave this decision up to you and your CPA. We want to give you and your CPA the flexibility to decide if questionable expense items falls under the repair or improvement category.
Looking for more insight into the "repairs vs. improvements" topic? Check out this helpful resource!
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