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29 Mar 2023

Rental Property Remodeling and Deduction

The Joy of Being a Landlord 

Being a landlord can be a rewarding experience that provides passive income, tax benefits, and long-term wealth accumulation. However, it also requires time, effort, and grit to deal with the challenges and responsibilities that come with property ownership.  

One of the responsibilities (or joy?) of being a landlord is maintaining the property. You may need to remodel as part of the maintenance. Remodeling is an investment and can be costly, and you want to make sure you can maximize your tax deduction with your remodeling expenses.  

Can You Deduct Remodeling Expenses? 

Typically, you can deduct remodeling expenses for your rental property as a business expense on your tax return. Remodeling expenses are considered capital expenses, which generally cannot be deducted in full in the year they are incurred. Instead, they are typically depreciated over a period of several years. 

The amount and timing of the depreciation depend on several factors, including the type of property, the cost of the improvements, and the applicable depreciation method. In general, the cost of major renovations, such as adding a new roof or replacing a heating system, will be depreciated over a more extended period than more minor improvements, such as painting or installing new carpet. 

What Can You Deduct? 

As a landlord, you can deduct a wide range of remodeling expenses related to your rental property. Some of those items include: 

  1. Materials and labor costs for repairs and improvements made to the rental property, such as fixing a leaky roof or upgrading the electrical system. 
  2. Costs associated with upgrading or renovating the rental property, such as installing new appliances, cabinets, flooring, or fixtures. 
  3. Fees paid to architects, engineers, or other professionals for design or planning services related to the remodeling project. 
  4. Permit and inspection fees paid to local government agencies for remodeling work. 
  5. Rent or other temporary housing expenses for tenants who must vacate the property during remodeling. 
  6. Travel expenses related to the remodeling project, such as mileage, meals, and lodging, if you need to travel to the rental property to oversee the work. 
  7. Depreciation of the cost of the improvements over the useful life of the property. 

It is essential to keep accurate records of all remodeling expenses, including invoices and receipts. You may also need to provide a description of the improvements made and when they were completed. 

Should You Hire Help? 

Tax rules for rental properties are complex and difficult to navigate, particularly when it comes to depreciation, capital gains, and passive activity rules. It is recommended that you consult with a tax professional, as they can help ensure that you comply with applicable tax laws and regulations, maximize your deductions, and minimize your tax liability. In addition, your tax consultant can also help you plan for the future by providing advice on tax planning strategies, such as the use of tax-advantaged retirement accounts or the timing of property sales. Your tax consultant can be a valuable partner for providing you, the landlord,  guidance, expertise, and peace of mind when it comes to tax compliance and planning

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