Repairs or Improvements? Which is better for Your Rental Property

Increases Your Rental Property Value Through Repairs and Improvements

Rental Property Repairs

Rental property repairs are not the same as improvements because nothing is actually being improved when making repairs. Instead, repairs will restore your rental property to its normal condition after something breaks or stops working correctly.

The most common repairs for rental properties are minor, such as unclogging a toilet and patching up small holes in your walls. These repairs are not even significant enough to claim as a deduction on your income tax return because they hold very little value in the eyes of the IRS. 

Therefore, you cannot enjoy any tax benefits from repairing your property of these minor issues. 

Rental Property Improvements

When you improve a rental property, you are making it better. It could mean you’re building a new shed in the backyard or adding an extra bedroom to the house. Sometimes an improvement could mean replacing old carpeting with new carpeting. All these improvements add value to your home because the work goes beyond simply maintaining the home’s current condition. 

Improvements increase the lifespan of the rental property. The IRS considers this a capital expense because the improvements can appreciate over time. So when you fill out your income tax return each year, you divide the improvement expenses and claim a small deduction equal to a percentage of the total costs. 

The cost of improvements is usually much greater than the cost of repairs. That is why the IRS will allow you to claim them on your tax returns.

About Tax Deductions on Rental Properties

The reason you cannot deduct the full cost of your improvement project on a single year’s tax return is because the improvements depreciate in value. The IRS would prefer you claim incremental tax deductions each year on the improvement costs to balance it out with the depreciating value of the improvements.

There are two kinds of property improvements: Structural and Non-Structural improvements. Structural improvements are things like adding a new bedroom or shed to the property. The IRS creates a 39-year depreciable schedule for structural improvements. Non-structural improvements are things like replacing the carpeting or tiles on the floor. The IRS has a faster 15-year depreciable schedule for non-structural improvements. 

Land doesn’t depreciate, so you cannot claim any depreciation deductions for it. But if you spend money to prepare the land for a future tenant, you could depreciate these land preparation costs on your tax return. An example of land preparation is cutting down trees and bushes next to a home to make room for a structural improvement. In this case, you can depreciate the cost of cutting down the trees and bushes.

Are you planning to sell a rental property? If so, you must know the exact cost of each improvement and its depreciation value. The IRS will have you pay income taxes based on the total depreciated amount for the given year. Please keep an accurate record of all your receipts and expense documents to ensure you do your taxes correctly.

The IRS wants rental property owners to depreciate and capitalize the following types of expenses:

Property Improvements and Restorations

You can capitalize the expenses of improving or restoring a rental property or modifying it to serve an entirely new purpose. 

Betterments

Betterments are any improvements that increase the value of the property, such as repairing building defects, expanding the size of the property, or boosting the quality or strength of a property. You can capitalize all your betterment expenses like these on your tax returns.

Restoration

Restoration is a major repair made to something badly damaged or left in despair due to a casualty event. For example, if bad weather caused major structural damage to your home, you would spend money on restoring your structure back to normal again. That would be a restoration expense rather than a repair expense. As a result, the IRS would allow you to capitalize on these expenses.

Adaptation

Adaptation is more like a conversion rather than an improvement. It means you are altering the current state of your property to serve a new purpose or function. The best example is when a property owner turns their single-family home into a multi-family home. You would be able to capitalize on these expenses of performing this adaptation project. 

Should You Improve Your Rental Property?

Yes, of course. If you do things like replacing old flooring and kitchen appliances, it will increase the value of your property. Not only that, but it would make your tenants extremely happy too. Then you won’t need to worry about performing maintenance duties or listening to complaints from your tenants. In addition, you could save even money and receive special tax advantages for installing smart home features and energy-efficient appliances. 

If you decide to make improvements, you’ll need to incorporate the expenses of the improvements into the monthly rent prices for your tenants. But you must be careful not to set high prices or else you won’t get any tenants. Research other rentals in your neighborhood before renovating anything on your property to ensure you don’t charge too much for rent.