Remodeling Your Rental Property: Tax Deductible Expenses & Ways to Save
In many rental markets across the United States, a proverbial arms race is underway. Florida is no different. When considering which remodeling projects for your rental property are tax deductible, take into consideration immediate deductions versus depreciation, as well as what improvements can affect your resale value.
Property owners and managers are starting to reinvest some of their rental revenue back into the property and make upgrades, which gives them a competitive advantage in attracting the best renters.
The good news is that it’s not too late to remodel your own rental property. In this article, we’ll review some of the upgrades you should prioritize first, how to maximize your return-on-investment, and where you can save money on your remodel.
Start with the essentials
It may be boring, but you should first focus on taking care of the property’s essential maintenance, repairs, upkeep, and replacement needs. This includes caring for the property’s roof, plumbing, drainage, structure, electrical wiring, and HVAC systems. A problem with any of these elements could lead to major expenses and headaches for you and your tenants down the road.
Proactive property owners can often avoid significant future costs by investing in their property in the present. Here are a few examples:
- HVAC: Schedule an annual maintenance appointment for both the air conditioner and the furnace. Address any recommended repairs promptly, and consider replacing the unit if your local technician thinks it’s on its last legs. By staying on top of what your HVAC systems need, you can avoid costly in-season repairs and potential renter dissatisfaction.
- Roofing: Issues with a property’s roof tend to start small but escalate quickly. If you’ve noticed missing shingles or other damage, it’s time to bring in an experienced roofer to inspect the structure. Taking care of a roof’s issues early can prevent leaks and all the associated damage they can cause.
"Household repairs on rental property can be claimed as tax deductions unless the repairs are done during the course of a more extensive remodeling project. According to the IRS, repairs are projects that do “not materially add to the value of your property or substantially prolong its life. … A repair keeps your property in good operating condition.” Examples of repairs include interior or exterior painting projects, repairing broken pipes, replacing damaged windows and fixing a broken toilet."
Rental property repairs and improvements or remodeling efforts on your rental property are all tax deductible, with the right records.
Maximize your return-on-investment
Once you’ve tackled the property’s upkeep needs, it’s time to start making upgrades. The best rental property remodeling projects should:
- Increase the overall value of the property, increasing your return should you decide to sell.
- Increase the amount of money you can charge for the property on a monthly basis.
The best way to accomplish both of these goals is by completing a remodel of the property’s kitchen and bathrooms. An updated and modern kitchen is high on the wish list of most prospective buyers and renters. With new countertops, cabinets, floors, and appliances, your property will be able to attract more interest from long-term renters. Similarly, a master bathroom with a new shower and vanity can be a major selling point for your property. When upgrading appliances, make sure to include an Appliance Repair Addendum with your new lease agreement.
So, how do you get the most out of what you invest in the property’s kitchen and bathrooms WHILE getting that tax deduction for the rental remodel project? We recommend you:
- Find middle ground: You won’t get your money back if you buy high-end appliances for your rental property. But, on the other hand, you’ll also get what you pay for if you buy the cheapest materials for the kitchen or bathroom. Find a comfortable middle ground where you buy quality mid-tier products. Try to find sales that keep your upfront investment low.
- Avoid the teardown: Not every kitchen needs to be torn down to the foundation. Contrary to what the “open kitchen” movement says, the layout is rarely the issue in a rental property. Work within the limits of your budget and change out cabinets, countertops, and floors. If you do want to extensively remodel, get multiple competitive quotes from trusted contractors in your area.
- Win the small battles: Some upgrades—such as new counters and cabinets—are big-ticket purchases. However, small, inexpensive changes have their place, too. Hanging new lights, adding a tile backsplash, or repainting the walls won’t cost you thousands, but can make all the difference in how the space is perceived.
- Keep all receipts! Remodel rental property improvements are tax deductible as a capital expense, meaning you get to depreciate those expenses over years (ca-ching!). This great article from landlordology has a terrific chart to help you identify a rental property repair versus a rental property remodel or improvement, so that you can let your CPA know accordingly.
Set a scope and limitations for your remodel
Keeping a remodeling project within the constraints of a tight budget can be a challenge for most property owners. It’s important to establish an initial scope for the project and go into the remodel with a clear understanding of what you want to get out of it.
Unlike remodeling your own home, renovating a rental property cannot be either a labor of love or an expensive splurge: there needs to be a clear benefit and return-on-investment that comes with putting in a new kitchen or bathroom.
Remember, with a remodel, you won't get the full tax deduction up front, it will come in the form of depreciation over years.
Additionally, per landlordology.com,
"Likewise, when you sell a property, you’ll need to know the costs of these improvements and how much each one has been depreciated because you will have to pay taxes on the depreciated amount."
In other words, you may not be able to reconfigure the kitchen, bathroom, living room, or backyard exactly the way you’d want it in your home, and that’s fine.
As long as the space is usable and looks clean, it will be attractive to renters. If you have to make compromises, do so on the extent of remodeling you do in the property, never on the quality of the materials used or the people you hire to work on the home.
Need More Information?
If you own a rental property, or are considering turning a home into a rental property, in Jacksonville, FL or Pensacola, FL and have questions about what would be a rental repair vs a rental improvement and what needs to be done to get your rental property up to Florida rental state code requirements - give us a call.
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