It’s no small challenge as a landlord to identify which work on your property qualifies as an expense and those improvements that must be depreciated over time.
In an ideal world, everything would be claimed as repair and maintenance, as these deductions are immediately deductible in full. But, of course, the world is not like that.
Improvements that might add to the value of your property are deemed a “capitalized asset” and deductions must be applied in increments over the lifetime.
As an experienced real estate agent, I am often asked about what improvements qualify for a 100% deduction in the current tax year and those that must be amortized over time because they’re a capital asset.
My advice is always the same – seek independent, professional advice. I think that’s the smart move for anyone interested in buying an investment property or thinking of becoming an investor.
Assessing which works on a property should be deducted or capitalized is complicated as several “safe harbor” tests can be applied. And there’s also a facility called “100% bonus depreciation” that your accountant or tax adviser will be familiar with. To make the most accurate claims and achieve the best financial outcome, you should consult a professional financial adviser or accountant.
But as a general guide, the cost of the following work can be deducted against income from a rental:
- Interior repairs and maintenance, such as fixing a roof leak, hole in a wall, replacing damaged doors, repairing appliances.
- Attending to plumbing issues, such as broken pipes or leaking faucets.
- Replacing or fixing permanent fixtures, such as in-build wardrobes, cabinets and lighting fixtures.
- Purchasing and replacing parts for appliances such as a stove, air-conditioning unit and water heater.
- Paying for inspections, including pest or building inspections.
Conversely, items that will fall into the capital expenditure bucket will focus on improving the quality or life expectancy of the property. These might include:
- Replacing essential infrastructures, such as electrical rewiring, plumbing or an air-conditioning or heating system.
- Installation of a new kitchen or bathroom.
- Replacing more than a third of the flooring or roofing.