Are you looking to make your rental property more attractive to potential renters? Or maybe you’re considering putting it on the market to sell. If so, you may be asking yourself, “Can I deduct remodeling expenses for rental property?”
The short answer is yes, but there are things you’ll need to know before getting started. To help you gain an understanding, TurboTenant dug up everything you need to know about remodeling expenses for rental property and the guidelines to follow.
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While you can deduct remodeling expenses on rental property, it’s essential to understand if the work you’re considering is a routine repair or a major renovation.
Understanding the difference is important because each has different tax rules, and we’ll dive into them next.
Routine repairs are minor work done to the property. Examples include painting the walls, replacing window trim, or fixing a leaky faucet. While these repairs don’t add value to the rental property, you can claim the expenses as a tax deduction in the year they occurred.
The other remodeling expense you might incur stems from major renovations, otherwise known as capital improvements. Some common examples include complete kitchen remodels, new roofs, or additions. Each renovation adds value to the home. However, how they’re handled for tax purposes differs significantly from routine repairs.
Rental property remodeling expenses are considered capital improvements that depreciate over 27.5 years, as defined by the IRS.
Each year, you can deduct the depreciation from your taxable income. For example, let’s assume you install a new roof, and it costs $20,000. You can deduct $727 ($20,000 / 27.5) each year for depreciation. Compared with a routine repair, the expense spreads out over 27.5 years. The difference is that you won’t deduct the entire cost all at once.
Ultimately, claiming the depreciation deduction is a great way to lower your taxable income. However, once you sell the rental property, you could face a higher tax bill because you can no longer claim the depreciation.
Remodeling expenses related to your rental property are just one available deduction for property owners. Several other expenses allow you to reduce your taxable rental income.
You’re allowed to deduct the amount paid toward interest on mortgage loans. These deductions include loans to purchase, refinance, or renovate the rental property. Unlike an owner-occupied property, which limits the mortgage interest deduction to the first $750,000, rental properties have no limits as long as the loan is used for the rental property.
Your property taxes on a rental unit are fully deductible business expenses. Property owners typically pay out of pocket twice yearly or through an escrow account. No matter how you pay property taxes, you’ll receive a statement at the end of the year. Like other deductions, they’ll reduce your taxable income.
Any insurance policy related to your rental property is tax deductible, including landlord insurance premiums and liability insurance.
TurboTenant allows you to advertise your rental property to find potential tenants. Unlimited property advertising with TurboTenant is free, but you can deduct other advertising costs, including marketing materials and signage.
Similarly, the property management tools you use to manage properties are deductible expenses. TurboTenant can help landlords screen tenants, collect rent online, and coordinate maintenance requests. These costs are deductible.
If you use a lawyer, accountant, or tax preparer to provide services for work related to your rental property, you guessed it, you can deduct these expenses.
As mentioned above, any of the typical repair expenses you incur are tax deductible. Make sure to keep detailed records to avoid the IRS’s ire.
If you own an apartment building, your tenants might be responsible for the utilities in their unit. However, water, electricity, and other utilities for the common spaces can be deducted as a business expense for your properties.
Do you use your rental property as a short-term rental? If so, hiring cleaners between guests would be a tax deductible expense.
Do you own property outside of your home city? You can deduct travel expenses any time you travel to check on the property. You can also deduct mileage when driving to and from your rental properties or to take care of business related to your rentals.
If there is a loss to your rental property because of a natural disaster, your insurance should cover the costs. However, this isn’t always going to be the case. Expenses not covered by insurance will be tax deductible.
There are also a lot of residential rental property expenses that are not eligible for tax deductions.
Land is not a depreciating expense for your rental property business. Instead, you must separate the land’s value from the property’s. The IRS doesn’t allow you to depreciate any improvements made to the land, like capital improvements to the property itself.
If you use the property for personal use or let friends or family stay there for a reduced rate, you cannot deduct some of the regular expenses. For example, you won’t be able to deduct the difference between the rent you collect from your friends and the actual market value. Plus, you can’t deduct expenses like utilities, maintenance, or property management costs if you use the property for personal use.
You will not be allowed to deduct security deposits unless they’re used to cover the costs of damages to the property or for unpaid rent. Only the unreturned portion is tax deductible if either of these instances occurs.
If you report income on a cash basis, you cannot deduct uncollected rent payments because the income hasn’t been recorded as income received.
If your rental property is in another city, you can only claim a tax deduction for the travel if the purpose was to manage your rental property.
If you list your property for sale and you’re not actively renting it out, you cannot deduct any expenses during this time.
If you’re late on your mortgage or other bills, you can’t deduct the fines or penalties you receive. The same is true if you receive a fine from the homeowners’ association.
Keeping track of remodeling expenses and other deductions is much easier when you’re organized. Depending on your comfort with technology, you have a few methods at your disposal.
Google Sheets and Microsoft Excel spreadsheets make keeping track of your expenses simple. Enter each expense you have, and then at the end of the year, you can send the documents to your tax preparer so they can help you claim every eligible tax deduction you had.
One of the advantages of using a Google Sheet is that you can access the document from any location. Whether you’re in your home office (which could be a deductible expense, by the way) or traveling, you’ll always be able to keep your records up to date. Excel could be more challenging unless you have a Microsoft 365 account.
If you’re more old school, you can keep paper ledgers with all your yearly expenses. It’s more time-consuming and difficult if you need to make a correction, but for some people, it works better.
A popular alternative is property management accounting software from TurboTenant. You can sync your bank account to keep track of remodeling expenses for rental property automatically—no more manual entry into a spreadsheet or software not specific to rental property owners.
Tax deductions can significantly reduce your business’s taxable income. However, following some simple steps is important to ensure you can fully take advantage of all possible deductions and not miss anything important.
If you’re planning to handle tax filing independently, it’s essential to understand all the tax forms you might need to use. Here’s a short guide to each.
The answer to whether or not you can deduct remodeling expenses for rental property is a firm yes, and renovating your rental property can have some significant advantages.
Property management software like TurboTenant will help you keep track of each expense. You can also use it as a bonus to collect rent online, provide tenant applications, and advertise rentals.
Sign up for a free account today.
An improvement to rental property is any upgrade that helps increase the value and longevity beyond its usual amount. Capital improvements depreciate over 27.5 years, and this is deductible on your tax return.
Most of the time, painting will be considered a repair. However, it could be viewed as a capital improvement in some situations. For example, if you painted your rental property simultaneously as you replaced the roof or added new siding.
A bathroom remodeling project would be considered a capital improvement because it helps increase the value and longevity of your home.
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