Characterizing Rental Deductions
January 13th, 2007 by Grant in: Rental Property, TaxesLast night I pulled out my “Rental Expense Receipts” folder and started sorting them out so my tax preparer wouldn’t have to. A money saving effort on my part.
I turned to the good ‘ole IRS for some guidance on how many categories I need to establish, and what I can deduct and what I can’t.
Turns out, there are just 3 categories: Repairs, Improvements and “Other”.
According to the IRS, a “repair” keeps your property in good condition. It doesn’t materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. Repairs may be deducted from your income.
However, they throw a catch 22 in the mess too:
“If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement.”
An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. Improvements must be depreciated.
A list of improvements may be:
- Additions: Bedroom, bathroom, deck, garage, porch, patio
Lawn & Grounds: Landscaping, driveway, walkway, fence, retaining wall, sprinkler system, swimming pool
Miscellaneous: Storm windows, doors, new roof, central vacuum, wiring upgrades, satellite dish, security system
Heating & Air Conditioning: Heating system, central air conditioning, furnace, duct work, central humidifier, filtration system
Plumbing: Septic system, water heater, soft water system, filtration system
Interior Improvements: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting
Insulation: Attic, walls, floor, pipes, duct work, etc
The “other” category pretty much takes care of all the other expenses, such as utility payments while the unit isn’t rented, mileage, interest, taxes, insurance, cleaning, advertising, etc.
So I took all my receipts and characterized each expense, placing each one into one of three envelopes. I also put all the expenses (including dates and a description) into a spreadsheet.
It turns out that $1,100 of my expenses last year were repairs, $2,500 were improvements, and just over $1,500 were “other” expenses. Note that none of these values contain mortgage, tax or insurance expenses.
Hopefully this effort will save my CPA some time, and me some money!
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January 17th, 2007 at 4:19 am
An interesting post on expenses, improvements and others. You have nicely put everything in order and made it easy for everyone to understand what is expense and improvement. Thank you for the helpful post.
January 19th, 2007 at 3:40 am
Hmmm, that “repair” versus “improvement” differentiation must be why our CPA bill gets more expensive every year. He has to sort through all of our Quickbooks entries to deliniate them. I’ll keep that in mind from now on. Thanks for the tip!
January 19th, 2007 at 8:30 am
Yeah, that will definitely knock some time off your CPA’s bill.
Grant