Rent maintenance is a major expense for landlords.
Your properties should be in great condition. This means that you will spend money every year on reliable insulation, weatherproofing, weatherproofing, and other HVAC systems.
Repairs are considered normal operating expenses by the IRS. The new repair regulations allow you to fully deduct any repair costs you incur in the same year as they were incurred. These expenses can be subtracted from your rental income to reduce tax.
For rental improvements, which are a different type of maintenance, this is not the case. It is a good idea to consider your maintenance projects repairs whenever you can for best tax results.
Here are some tips to help you document your rental repairs so that you get the most tax deductions.
What is Repairs?
Renter repairs refer to any maintenance that is required to maintain your property. They can only restore the property to its original condition.
If it is eligible for an operating expense, a maintenance expense would be considered a repair. Any expense that is:
- A common expense that will benefit your rental business.
- Current – A day-to-day expense, whose benefits expire less than one year later.
- Directly related with your rental business. Cannot be used for personal purposes (or, if it is, adjusted accordingly before deducting).
- Reasonable amount The amount is appropriate for the type and amount of expenses.
These repairs include painting a room, changing shingles or replacing HVAC filters.
Schedule E lists repairs and improvements. However, if audited you will need to show that your repairs meet the following four criteria.
These are some tips to help you document repairs that need to be audited.
All Tenant Complaints Should Be Documented
If you can show that the expense was caused by a problem, it’s easy for an expense to be deemed a repair. You should keep a record of each tenant complaint.
Each maintenance request should be filed.
These complaints can be overwhelming if you are a landlord with many tenants. You can save time by using the maintenance management function in your property management software to avoid the tedious task and paperwork of recording and filing maintenance requests.
Tenants can submit maintenance tickets online. They can attach photos or videos to the ticket. The software will generate records automatically and save them for you to refer to in the future.
Separate and supervise invoices
Ask for separate invoices if you have to call the maintenance contractor for multiple tasks. You can then classify each expense as a repair or an improvement.
The IRS may consider the whole expense to be an improvement if you keep them all together. Even if the contractor did repairs, you will miss great tax deductions.
Delay Big Projects
The tax code states that you cannot deduct repairs expenses until the building is ready to rent. Repairs done before that date are considered start-up costs, and not operating expenses.
The $5,000 limit for start-up expenses is $5,000. It’s best to wait until you sell your properties before you estimate that you will exceed the $5,000 limit. You can then deduct the repair from your operating expenses without any limit.
Do preventative maintenance
Preventative maintenance can always be fully deducted as an operating expense. This includes all regular maintenance that you do to prevent any future problems with your property.
Keep track of expenses carefully
The most convincing arguments against an audit are those that are most detailed. Keep detailed records of every expense and their classification to prove to the IRS that they are as you claim.
It is important to classify repairs in your books as such. You will have complete records in the event of an audit. In addition, you will have all your expenses organized and ready for you to list on Schedule E when it comes time to file taxes.
Understanding Rental Repairs to Tax Success
Rental property taxes are one the most complicated concepts in real estate. You don’t need to know every word unless you really want to. You can get the best tax deductions by using property management software and understanding the tips and ideas listed above.