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Ask Millionacres: When Should We Do Improvements on a Rental Property?

[Updated: Feb 23, 2021] Feb 23, 2021 by Liz Brumer
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Q: "We are moving to Europe and would like to rent out our home. Do improvements need to be made while it is rented or do you have 30 days prior to do the work (paint, roof, deck, etc.) to be tax deductible?" -- Raymond

Tax code can be a bear to interpret and we cannot give you individual tax advice, only your tax advisor can do that. However, understanding the difference between deductions and depreciation as well as when and how they apply can make a big difference to your bottom line. It will also be important to consider the length of time you versus the tenant occupied the property.

There is a technical difference between repairs and improvements. In most cases, improvement expenses are not going to be direct dollar-for-dollar deductions the same year you paid for them because they're considered to have benefits over an extended length of time. Instead, they're considered with depreciation over time.

It's also important to do a little research to get a list of qualifying home repairs. The IRS breaks down repairs and improvements into three categories:

  1. Improvement
  2. Betterments
  3. Restoration

Which category your repairs fall under can be the difference between a deduction and a capital expense. Unfortunately, there is also no solid answer on the amount you can depreciate because it is dependent on your cost basis and recovery period for the property and depreciation method used. With that being said, the Internal Revenue Service (IRS) states you are able to depreciate legitimate improvements to a rental property starting the same calendar year that your rental is first placed into service.

Records are key

But keep in mind that the first year you move out, you will also have to break down the amount of time you occupied the property versus the renter. The expenses, whether deducted in full or depreciated over time, will have to be prorated only for the months it was used as a rental property. For example, if you move in August and someone starts renting in September, you will have to prorate your total expenses accordingly. If the year's expenses amounted to $12,000 (even if all related to the rental-property improvements), you would only be able to claim $4,000.

It will be critical to keep accurate records of all expenses as well as activity and use of the property just in case you need to prove or justify your deductions. Ideally, you would consult with your certified public accountant (CPA) ahead of time so that you can get a more accurate breakdown for your specific situation, but they will be able to help you after the fact as well. Your CPA just might be able to help you optimize your deductions if you're able to make improvements armed with the knowledge of what, how, and when before getting to work.

The bottom line

You can count your expenses against your rental income within the same calendar year, but you will have to take into account whether it's a repair or improvement as well as break down the owner-occupied versus rental-property time frame at least for that first year.

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