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Real Estate Repairs Vs. Improvements Analysis

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Real Estate Repairs Vs. Improvements Analysis

 

Real estate investors can save thousands in tax simply by distinguishing repairs (deductible now) from improvements (depreciable over time):

  • Repairs keep your property in good operating condition, but don’t materially add to its value or prolong its life. Examples include painting, plastering, repairing broken windows, and fixing gutters, floors, and leaks.
  • Improvements add value to your property, prolong its useful life, or adapt it to new use. Examples include room additions, upgraded appliances and mechanics, landscaping, and replacement components such as windows and roofs.

Unless your losses are limited by passive activity rules, it generally pays to favor deductible repairs over depreciable improvements. Here are four strategies to do so:

  • Segregate repairs from improvements. Request separate bills for separate jobs; have contractors itemize work as “repairs” rather than “renovations” or “improvements”; and use separate contracts or contractors for separate jobs.
  • “Repair” rather than “replace” wherever possible. Refinish rather than replace floors; replaster rather than replace walls; replace shingles rather than an entire roof. (Tax Court has ruled that replacing a roof may be a repair because it merely kept the property in operating condition over its probable operating life.)
  • Use similar or identical materials as the old.
  • Repair property while tenants are in residence.

If you can’t legitimately characterize costs as repairs, some advisors suggest you deduct any remaining basis in the original components as “abandoned property”.

Example: In 2013, you buy a duplex for $100,000, which includes a roof valued at $5,500. Five years later, you spend $8,000 to replace the roof. Deduct the remaining $4,400 basis in the old roof in 2018.

 

 

 

 

 

 

 

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