Operating expenses are unavoidable when running an investment property. Repairs, improvement and maintenance form the three common ones. One of the questions you need to ask as a landlord is:
When can an expense be considered a repair and when can it be considered an improvement?
The reason is that repairs and maintenance are considered currently deductible expense; that is, they can be deducted in the year that they occur. Improvements, on the other hand, are considered depreciation. That is, they may take up to 27 years before deductions can occur.
Classifying an expense as either a repair or improvement can be worth thousands of dollars in tax deductions. So follow these tips to properly deduct repairs and maintenance on your rental property.
1. Document everything:
How do you prove that something was actually broken and need fixing? Make sure any email or message by your tenant through a service provider is saved and hold on to that as evidence.
2. Don’t replace stuff until absolutely necessary:
Replacements are considered an improvement. For anything to be termed a repair, it must not materially add value to the property. When you send a plumber in to fix your tenant’s sink for instance; make sure he tries his best to repair before replacements are considered.
3. Preventive maintenance is considered a currently deductible expense:
Make sure your property is kept in good working condition, not just because of the tax benefits but because there would be less repairs or improvements down the line.