The Implications of Rental Property Repairs Versus Improvements
Published on: Wednesday, December 16th, 2015
Does it make more sense to repair something or to make improvements on your rental homes?
Doing a repair versus doing an improvement on your rental property will impact you on two fronts: It will affect how you take deductions when filing your taxes, and it will affect the value of your property.
First let’s talk about taxes. The full cost of a rental repair can be deducted in a single year, while an improvement must be depreciated over multiple years. A repair won’t add value to your property, so think of repairs as general maintenance that keeps everything in working order.
An improvement is an upgrade to make the property better than it was. An improvement typically is a larger, more expensive and longer-lasting change or adaption to the property than a repair. Think of it as something that is going to make your property more marketable over the long term.
Now let’s talk about appreciation. Unlike repairs, improvements generally will affect your property’s value. If you replace old kitchen cabinets and upgrade the counters from laminate to granite, that is an improvement. If you replace a few cracked tiles on the floor without replacing the entire floor, that is a repair.
Your goals for the property will impact your decision to make repairs or improvements. If you want to attract higher rents, then it might make sense to do improvements over repairs even though you will have to depreciate the expense on your tax returns over multiple years. A nicer home will attract higher rents.
If you want to keep costs in check and take a full deduction of your expense in a single year, a repair might be your best bet.
In terms of appreciation of your asset, that is something to take under careful consideration. An asset that appreciates may result in a higher property tax bill. If you plan to hold the asset long term, you may not want the higher property tax bills that may be associated with an improved property, however, the higher taxes could also be offset by higher rents.
If you plan to sell the property relatively soon, improvements may raise your sales price and result in a higher return on your investment.
As you can see, some thought should go into whether it makes the most sense to do repairs or improvements. We also recommend that you consult with your accountant regarding the tax implications of repair versus improvement before you make a decision, especially in instances where either route will be expensive.
If you would like to read more on residential rental properties and how they are treated under IRS rules, click here.