When considering remodeling your rental property, you may be wondering if the expenses are deductible. The short answer is yes, but there are a few things to keep in mind.
In this post, we’ll go over the basics of deducting remodeling expenses for rental property owners. We’ll also provide some tips to help make the process as smooth as possible and to maximize your deductions when tax time rolls around.
Key takeaways
- You can usually deduct certain expenses when remodeling your rental property.
- Costs associated with remodeling a rental property for sale are usually tax deductible for the same year the expense incurred.
- If you make capital repairs to add value or improve the property, you will generally need to recapture the costs via depreciation.
- When remodeling a rental property, keep a list of all the expenses you incur. This can help limit the amount of capital gains owed after selling the property.
How do I deduct rental property remodeling expenses?
Remodeling a rental property can be a great way to add value and make extra income. But it’s important to know which remodeling expenses can be deducted on your taxes. Here are some common upgrade expenses that you may be able to deduct in the same tax year they’re incurred:
- Repairing worn-out carpeting or flooring
- Updating appliances
- Painting walls or ceilings
- Installing new light fixtures
- Refinishing countertops or cabinets
- Updating windows and doors
- Adding soundproofing to your rental unit
- Improving the landscaping of the property
To deduct these expenses, you may need to itemize them on your tax return and have receipts or other documentation to support the deduction. Costs associated with repairs on your rental property can be deducted from your income tax. These costs must be current repair-related expenses that do not increase the property’s value.
You can maximize your deductions and reduce your tax liability with careful record-keeping. As always, investors may wish to speak with their tax advisor to better understand which rental property remodeling expenses may be deducted in their specific situation.
Capital improvements vs. remodeling expenses: What’s the difference?
A capital improvement is an expense that will increase the value of your property, extend its lifespan, or make adjustments for new uses. Capital improvements cannot be deducted as a current-year expense as they need to depreciate over time. You can split up the expenses over time, claiming a small percentage of expenses for the current and future tax years.
The capital improvements must be made to the property’s structure, such as adding a new roof or upgrading the plumbing. The cost of these capital improvements is typically spread out over 27.5 years. So, if you make $10,000 in capital improvements to your rental property, you can deduct $363 from your income each year for 27.5 years. This can help to offset the cost of owning and maintaining a rental property.
Once you’ve calculated the amount you can depreciate each year, you’ll need to claim it on your taxes. You can do this by itemizing your deductions and including the depreciation amount on Schedule E of your tax return.
Remember that claiming depreciation will lower the value of your property for tax purposes, which could result in a higher tax bill when you eventually sell the property. However, it can be a useful way to reduce your taxable income in the meantime.
Examples of capital improvements include:
- Replacing a roof
- Adding or expanding a bathroom or bedroom
- Building a deck or patio
- Replacing the furnace or air conditioner
- Upgrading the electrical system
- Resurfacing the parking lot
- Installing a swimming pool
Other common rental property expense deductions
There are other types of deductible expenses that you can claim on your taxes to reduce your taxable net income, such as repairs and maintenance, insurance, mortgage interest, property taxes, and depreciation.
Repairs & maintenance
Most repair and maintenance expenses can be deducted if you don’t have to capitalize the expense. These are typically repairs or work needed to keep your property in good operating condition.
Insurance
Most landlords have some type of insurance for their rentals. Such insurance premiums as hurricane, fire, or personal liability are all considered business expenses and can typically be deducted. You can also deduct for any employees that have insurance through your rental property business as well.
Mortgage interest
If you have a mortgage on your rental property, the interest is tax deductible. This can be a significant deduction, especially if you have a large mortgage or multiple mortgages. The key is ensuring you keep good records of your expenses. Be sure to keep track of all your interest payments, as well as any other expenses related to your rental property.
Property taxes
Your county assessor will levy your property taxes yearly, often paid in semiannual installments. Check your statement at the end of the year if you have a loan on your rental property because the property taxes may already be included in the monthly mortgage payment.
Depreciation
Property depreciation is a noncash expense that rental property investors use to decrease the taxable net income. The property’s depreciation value is based on the premise that the property’s value will decrease throughout the years. You can start to depreciate your rental property once it is ready to rent out, and it must take over the expected life of the building.
The IRS has established a schedule for how long different types of property are considered to be useful, and for residential rental property, that period is 27.5 years. That means that each year, you can take a deduction for a portion of the cost of the property.
For example, if you purchase a rental property for $100,000 with a useful life of 27.5 years, you can deduct $3,636 each year for 27.5 years. That deduction will help to offset the costs of owning and maintaining the property.
How to keep track of rental property expenses
Having a good tracking system is the key to success when it comes to handling your property expenses. Some great options include using hand ledgers, spreadsheets, bookkeeping software, or rental property software like Stessa.
Stessa offers free cloud-based software that helps real estate investors maximize profits through smart money management, automated income and expense tracking, personalized reporting, rent collection, and more. More than 200,000 investors already use Stessa to track over 250,000 properties with more than $60 billion in asset value.
Hand ledgers
Hand ledgers are an old-school way of keeping track of expenses, but they still bring value to landlords. A ledger is a logbook where you manually track rent payments. Its format usually consists of columns for debit and credit transactions, account details, and transaction dates.
Pros
- Inexpensive
- Flexibility when entering information
- Easy accessibility to your data
Cons
- Need to manually enter data
- Requires some experience with double-entry accounting
- Can be easily misplaced or damaged
Spreadsheets
Spreadsheets are extremely useful in keeping all of your expenses and data in one place. Property owners can easily track and calculate their monthly costs, property taxes, and any owed expenses. You can either create your own spreadsheet or use an online template.
While there are various types of spreadsheets to use, most provide information such as the property’s market value, the original price you purchased the property for, monthly and yearly expenses, and more.
Pros
- Flexible
- Computes calculations easily
- Great for small properties
Cons
- Hard to track complicated expenses and incomes
- Data needs to be manually entered
- Increases your likelihood of errors
Software
While it’s true that landlords can use generic accounting software like QuickBooks or Xero for rental property bookkeeping, there are some definite drawbacks to using general-purpose software.
For one thing, you’ll have to input a lot of data manually, and it can be easy to make mistakes. In addition, you won’t be able to take advantage of all the features that come with specific rental property bookkeeping software. However, the biggest downside to using general-purpose software is that it’s not designed for real estate investors who want to keep track of remodeling expenses for rental property.
A platform like Stessa can be a better solution for real estate investors who want to keep track of their rental property remodeling expenses. Stessa offers easy-to-use tools for tracking income and expenses, calculating depreciation, and creating custom reports to show you exactly where your money is going.
Best of all, Stessa is designed specifically for real estate investors, so it’s easy to use and comes with all the features you need to manage your rental properties effectively.
With Stessa, you also get access to things like:
- Automated accounting tools
- Manual expense tracking
- One-click smart receipt scanning
- Mileage tracking
- Automated bank feeds
- Centralized dashboard with key metrics and complete chart history
- Rental applications
- Tenant screening
- Landlord banking*
- Mobile app (iOS and Android)
- eSigning for documents and leases
Go here to create a free Stessa account.
*Stessa is not a bank. Stessa is a financial technology company.Terms and conditions, features and pricing are subject to change. This article, and the Stessa Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, financial, legal, or real estate advice.
