Tracking important tax deductions throughout the year

Ginger Dean

June 30, 2014

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Being a landlord can be costly. Whether you're spending money on the home for renovations and upgrades or paying for emergency repairs, those dollar signs can really add up. Wouldn't it be great if you could get some of that money back on your taxes? Good news: you just might be able to.

Landlords must distinguish repairs from renovations

One of the major factors that determines if a landlord can deduct certain expenses is to clarify if the cost is for repairs or for renovations. Repairs to investment properties make the property livable, whereas renovations improve the property's state. The two are usually declared separately from each other on your tax return, and they are also deducted separately from ordinary income and expenses.

Is that a repair?

The Internal Revenue Service does allow landlords to take a first-year deduction on repairs. That's why it's important to distinguish between the two. Repairs are necessary due to damage. They put the property back to an acceptable rental condition i.e. the same condition that it was in prior to the damage. Repairs do not add to the value of a property or change its function, unlike renovations.

Landlords may prefer to declare home expenses as repairs because it helps restore or increase their cash flow. In plain English, fully declaring expenses for repairs in the current year helps landlords get some of their money back sooner than later.

Or is it a home renovation?

The IRS does not allow landlords to take a full deduction in the current year for expenses that are considered to be a renovation or improvement. These costs cannot be fully deducted in the current year. According to RealEstate.com "the costs for renovations have to be recovered over the useful life of the property - typically 27.5 years for residential real estate, and longer for commercial real estate."

How can landlords maximize their tax deductions?

The easiest way to take full advantage of all tax deductions is to keep meticulous records all year round. There is nothing worse than rushing at the last minute to try and find all your receipts from expenses throughout the year. Keeping records as you incur expenses throughout the year will make your life a lot easier come April.

Keep in mind the IRS understands normal repairs are a part of owning a property. They do give landlords some wiggle room when it comes to deducting expenses.

Landlords don't have to have an accounting degree, but they should have a good accountant. Your job as a landlord is to keep receipts for all your expenses and your accountant's job is to make the best use of them. There is no need to know the ins and outs of federal tax laws and the provisions in your state, just a basic knowledge will do.


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