Whenever you repair or replace something in a rental unit or building, you must decide whether the expense is a repair or an improvement, for tax purposes. Many owners and rental property owners take advantage of a loophole by ‘home repair’ after a tenant has moved out. They then charge the tenant for the repair that has been fixed. Therefore, it is important that you know the difference between home repairs and improvements.
What is an upgrade?
Improvements are changes you make to your property that add value. The replacement of the property’s major systems or components is also considered an upgrade. Installing wood floors, fixing water heaters, building a roof, are examples of improvements.
What is a repair?
A repair is the maintenance that is required to keep the property in working order. They include painting, fixing a broken toilet, and replacing a faulty light switch. Suppose your tenant drills a wall through your wall and you have to repair the wall, you can claim that this is a repair.
Deduction of improvements in your taxes
Improvements must be depreciated, but their full value cannot be deducted in the same year the changes were made. This is because improvements add value to the property in subsequent years, and not just in the year in which they were made.
Deduction of repairs on your taxes
A repair is a deductible expense during the year you pay for it. You can deduct the full cost from your taxes the same year the repair was completed. A smart tip to correctly deduct repairs is to document them. Usually a repair arises because of the tenant’s complaint. Therefore, please document this complaint as it indicates that something has been damaged and you had to fix it.
What if it’s a bit of both?
What if you come across a repair that requires you to build a portion of the composite wall? Is this classified as a repair or an upgrade? In such cases, it is better to consult an expert.
An upgrade adds value to your property, but the cost of a repair can be immediately deducted from your taxes, leaving more money in your pocket. It is common for landlords to make tenants pay for the repair, and this usually comes from the security deposit paid by the tenant. With the tenant already living there, the landlord can claim that the work is necessary to keep the tenant satisfied.
Living in a rental property cannot be as pleasant an experience as living in your own home. But be careful when claiming your home repair and improvement taxes!
