One of the benefits of investing in rental property for retirement income is that any money you spend toward maintaining or upgrading the property not only increases its future value, but also returns to you in the form of tax deductions. Three kinds of tax-deductible expenditures for rental property upkeep include money used for maintenance, repair and capital improvements.
When you purchase a rental property as an investment, you become responsible for the maintenance of that property in keeping with the standards of local municipal building and housing codes. Whether you handle those tasks yourself or outsource them to a property manager, your expenditures are considered business expenses and can be deducted from taxes. Expenditures for ongoing maintenance and repair can be deducted in the current tax year, while expenses for capital improvements are amortized over the life of the mortgage.
Maintenance expenditures include anything that contributes to keeping the property safe, habitable and attractive. Tasks such as painting dwellings, interior and exterior, ongoing cleaning and regular lawn upkeep such as mowing and tree trimming are considered routine maintenance. A well maintained property also attracts stable, quality tenants and potentially higher rents to offset mortgage payments.
Repairs to the property are also tax-deductible and include such things as fixing or replacing broken appliances, non-working heaters and coolers, or a leaky roof. Although municipal codes hold the owner responsible for making repairs to keep the property safe and habitable, tenants can be held responsible for repairs due to damage they cause if the lease or rental agreement so states. Immediate fixes like these fall under the category of business expenses.
Capital improvements are major repairs or maintenance jobs that are intended to extend the viable life of the property and increase its future value. A roof patch to eliminate a leak, for example, is considered a repair, deductible in the year it’s completed; replacing the entire roof constitutes a capital improvement that can be deducted incrementally over the life of the mortgage, because it extends the property’s useful life and adds value. Similarly, paying a monthly lawn care fee is considered maintenance, while a complete landscaping job is a capital improvement.
All expenditures related to these categories are deductible: labor, materials, equipment rental, and anything else directly related to getting the job done. Your travel is also deductible, whether you do the job yourself or make periodic visits to the property to check on others hired for the task. Any wages you pay to an on-site manager also count as deductible expenses. It’s essential to keep all receipts and agreements related to maintenance tasks, and to maintain accurate business records of all your actions as owner of the property.
As Jason Hartman advises, buying rental property is a smart retirement investment, with the potential to increase in value over time. Regular maintenance and major improvements when necessary can not only add years to the life of your investment, but will also increase its income potential and provide significant tax breaks along the way. (Top image: Flickr | garethjmsaunders)
The Heroic Investing Team