Is it a repair or a capital expenditure?
Before we answer the question about home improvements being tax deductible or not, it should be remembered that one must first ascertain whether an expense qualifies as a repair or improvement. The difference is nebulous and the pecuniary impact can redound to one’s discredit.
As a real estate investor, you will incur expenses related to the maintenance and upkeep of the premise. You can claim a tax deduction depending on whether the improvement is classified as a repair or a capital expenditure. If the former, you can retract the amount against that year’s rental income. However, if the latter case, the cost is depreciated over 27.5 years! The difference yawns an abyss – claiming full deduction each year or claiming small prorated amounts over nearly 3 decades.
What could comprise a repair and what a capital expenditure?
‘Repairs’ are fixes that neither add value to the property nor extend its useful life. They are essential to keep the property running well and normally. For instance, fixing the HVAC system, lights or shingles on the roof.
‘Capital Expenditure’ constitute improvements that add to the value of the realty or considerably prolongs its useful life so much so that it adapts the estate to a new or different purpose. For example, replacing the entire HVAC system, the whole roof or the complete plumbing.
So, what should you choose to do?
This is an ambiguous area so what you first need to decide is whether your aim is to save money by claim tax deductions or if you are comfortable with a capital asset that will be depreciated over 27.5 years. As the owner of rental property, you need to make the appraisal on whether a replacement is really necessary or if a patching-up will equate an equally fine job without compromising the quality and overall value of the building.
If you think you can mend, then mend you must. And then your property improvement tax is eligible to be subtracted. Because, as mentioned in an earlier paragraph, the difference otherwise yawns an abyss!