Capital Investments vs Repairs

7 Replies

I'm new to BP in terms of posting, but not in terms of reading/podcasting. 

I currently am an owner of two duplexes in Buffalo; one I live in and rent out half (owned 2.5 years) and the other I formed a partnership (LLC) with and recently started renting (3 months ago).

Both are cash flowing nicely, which is great. Given that I'm relatively new, I'm trying to get more information about how taxes work regarding real estate. I would really like to do whatever possible to minimize my tax liability and overall AGI in the short-term with the idea of being better equipped later in life. I'm hoping to get some more information about different strategies I could take to make this happen. 

For example, in my owner occupied duplex, the current rental apartment is in needs of lots of updates. The kitchen and bathroom are dated (60's/70's). How could I go about investing in updating my rental unit (obviously I would base how expensive the updates are on the rent I think I could get, I wouldn't be too extravagant), in a way that gives me the most benefits tax wise? Would an updated kitchen/bathroom be capital improvements that need to be deducted over time, or would they be replacements that could be deducted that year? How could I go about structuring these remodels and updates in a way that gives me the most tax benefit? 

I'd like to hear about this as well.

There are many definitions on what constitutes a repair (100% deductible in the year) vs replacement (depreciable over several years, usually 27.5 years).

If what you are putting in remains in place without needing to be replaced again after 1 year, it is an improvement/capital expenditure. Examples are new flooring, refrigerator, roof, etc.

If what you are putting in something that has to be repeated before one year, it's a deductible expense. Examples, lawn services, painting, HOA fees, postal supplies, printer paper, etc.

There are many definitions on what constitutes a repair (100% deductible in the year) vs replacement (depreciable over several years, usually 27.5 years).

If what you are putting in remains in place without needing to be replaced again after 1 year, it is an improvement/capital expenditure. Examples are new flooring, refrigerator, roof, etc.

If what you are putting in something that has to be repeated before one year, it's a deductible expense. Examples, lawn services, painting, HOA fees, postal supplies, printer paper, etc.

So, if you are going to be in a higher tax bracket in the future than today, capital improvements save you more in future years.

I would not worry about maximum tax benefits when choosing to do deductible expenses vs capital improvements. Focus on doing what's is reasonably required for the property and make sure I take the deduction/depreciation as appropriate.

Here is my advice. Be careful with your write offs if you plan on growing a portfolio. Banks will look at the repairs and take it away from your buying power. I don't not write off every little thing because my tax return is not as important to me as growing my portfolio at this current stage in the game. You want to show that the house is stabilized and performs on its own. If you plan on stopping here, then maximizing your return now may be more beneficial. 

@Jai Reddy It's not as simple as saying "everything that lasts more than a year is a capital improvement" especially after the release of the final tangible property regs. Additionally, while in certain situations capitalizing everything to have a bigger depreciation write-off may be beneficial, most of the time it's much more beneficial to take deductions currently, as a dollar today is worth more than a dollar tomorrow.

@Michael Lynch @Corey Demuth I have written a few articles for Bigger Pockets on the subject of capital improvements vs. repairs. If you guys read them and come back to me with specific questions, I'd be more than happy to help you out.

"most of the time it's much more beneficial to take deductions currently, as a dollar today is worth more than a dollar tomorrow"

Well said.

Thanks Brandon, could you like me to that article?

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