Can You Deduct Renovation Expenses for Rental Property?
Overview: Renovation Expense Deductions in Multifamily
Can you deduct renovation costs for rental property? Yes you can, but how you deduct them depends on whether they are classified as repairs or capital improvements:
1. Repairs (Deductible in the Year Incurred)
Repairs are expenses that keep the property in its current condition without significantly increasing its value or extending its life. These expenses are fully deductible in the year they are paid. Examples include:
- Fixing a leaky roof
- Repainting the property
- Patching walls or floors
- Repairing an HVAC system
- Replacing broken windows
2. Capital Improvements (Depreciated Over Time)
Renovations that improve the property, increase its value, or extend its useful life are considered capital improvements and must be depreciated over time, typically over 27.5 years for residential rental properties. Examples include:
- Adding a new roof
- Upgrading the plumbing or electrical system
- Remodeling a kitchen or bathroom
- Installing new flooring
- Adding a new HVAC system
3. Safe Harbor Rules & Exceptions
There are IRS safe harbor rules that may allow you to deduct certain improvements in the current year instead of depreciating them:
- De Minimis Safe Harbor: If an improvement costs $2,500 or less per item, you may be able to deduct it in the current year.
- Safe Harbor for Small Taxpayers: If your rental income is under $10 million, and your total property expenses (including repairs and maintenance) are under 2% of the building's unadjusted basis, you may be able to deduct certain improvements.
- Routine Maintenance Safe Harbor: If the expense is for routine maintenance that is expected to be performed more than once over 10 years (e.g., repainting, servicing HVAC), it can be deducted instead of depreciated.
4. Special Deductions:
- Bonus Depreciation & Section 179: While typically used for business properties, certain rental property improvements may qualify for bonus depreciation or Section 179 expensing in the year they are incurred.
- Energy-Efficient Improvements: Some renovations, such as solar panels, may qualify for energy tax credits.
5. What About Renovations Before Renting?
If you renovate a property before renting it out, the expenses cannot be deducted as repairs. Instead, they must be capitalized and depreciated because the property is not yet in service.
