Should you make improvement of rental property to reduce tax ?

12 Replies

What would you do to help reducing your taxes with your rental property income ? we have more income from our rental homes this year which is a good thing but other hand we will pay more taxes next year. Any thought. ?

That can be an effective strategy depending on how your portfolio is constructed and your plans in the near and distant future. It can be especially effective if you had lived in the home for the 2 of the 5 year requirement, rented it out the other 3, made improvements to reduce your taxable income, then sold the property and harvested the capital gains.

At some point, however, you have to just accept that if you are making money you are paying taxes. By all means try to minimize with deductions. If you are still working, you may find it worthwhile to pick up a property or two per year that needs a ton of work to give you some offsetting losses, then if/when you shift to a "No W2" condition you'll have less taxable income in the first place. 

@Yenlan Patton I don't think spending money to lower your taxable income is a good solution unless there are legitimate things your rentals need or if you have some differed maintenance that needs to be done.

Also Passive income is taxed much less than w-2 income. You have your normal deductions including depreciation that should lower your taxable rental income close to zero.

So I wouldn't spend money just for the sake of it as it will not be a good payback on the expenditure.

@Yenlan Patton I have W2 income that I am living off, so for me it is best if my properties take a tax loss and I can deduct from my W2 income. I would never do unnecessary improvements to get a deduction, but I do keep up on maintenance. For example, I just replaced a 36 year old roof. If was not leaking, but clearly it is at the end of its life. I have houses painted and bad siding replaced. I do deck repairs and landscaping projects that improve water low and reduce maintenance. I have a 35 year old AC unit that I plan to replace this fall. It is still working, but I can get a better price replacing it this fall versus in the middle of next summer, plus no angry tenant call. 

My strategy is to spend money now to keep my properties in great condition, so when I go to retire, there is not deferred maintenance. Once my W2 income is gone, I should have lower tax rate and lower expenses on my properties since they were well maintained. 

Some landlords won't spend a dime on something until it is falling apart. Arguably it increases cash flow in the short term, but that is just not my strategy. 

Keep in mind if you plan on getting financing next year, your lower taxable income will also determine your loan eligibility! Didn't know that. Dealing with it now trying to buy a primary residence. Had to qualify with a $68K income due to a TON of deductions for rental property improvements.

Most improvements are not tax deductible in the same year, pretty sure it's spread over 27.5 years. 

@Joe Splitrock Would you know the rules regarding this? I read somewhere that improvements costing less than $____ amount are deductible in full. Example: roofing job cost $4k so I get the contractor to bill me for $2k and another $2k separately. 

Originally posted by @Joe Splitrock :

@Yenlan Patton I have W2 income that I am living off, so for me it is best if my properties take a tax loss and I can deduct from my W2 income. I would never do unnecessary improvements to get a deduction, but I do keep up on maintenance. For example, I just replaced a 36 year old roof. If was not leaking, but clearly it is at the end of its life. I have houses painted and bad siding replaced. I do deck repairs and landscaping projects that improve water low and reduce maintenance. I have a 35 year old AC unit that I plan to replace this fall. It is still working, but I can get a better price replacing it this fall versus in the middle of next summer, plus no angry tenant call. 

My strategy is to spend money now to keep my properties in great condition, so when I go to retire, there is not deferred maintenance. Once my W2 income is gone, I should have lower tax rate and lower expenses on my properties since they were well maintained. 

Some landlords won't spend a dime on something until it is falling apart. Arguably it increases cash flow in the short term, but that is just not my strategy. 

 This is my strategy as well. I also don't do things on properties just to feel warm and fuzzy but I do my best to make my rental income break even/show a loss by adding properties & losses each year. When I stop working and have lower taxable income I will probably scale back. 

Originally posted by @Jaron Walling :

Most improvements are not tax deductible in the same year, pretty sure it's spread over 27.5 years. 

@Joe Splitrock Would you know the rules regarding this? I read somewhere that improvements costing less than $____ amount are deductible in full. Example: roofing job cost $4k so I get the contractor to bill me for $2k and another $2k separately. 

Some items are depreciated over shorter periods. Everything is deductible, but spread over the depreciation period. The time period depends on the item. It is really ideal if you can do repairs versus improvements. Repairs are taken in the same year they are incurred. For example if I have two rows of siding replaced, that is a repair. If I have the deck boards replaced, versus tearing off the deck, that is a repair. Some things end up getting depreciated, but if I am doing some improvements every year, that just means a continuous stream of  deductions. 

There is other deductions too, like certain acquisition costs of new properties. If I buy a new laptop or tools, that can be deducted. As a rental property owner you should be looking for opportunities to deduct everything possible. Talk to a good accountant about what this includes. 

If the ONLY upside is reduced tax, no. Why would you unnecessarily spend, say $10k, to save $500 in tax? If it also give the ability to increase income or reduce expenses, then it could be a good idea.
@Yenlan Patton record your mileage too and from rental properties, write off mortgage interest, if you plan to travel somewhere find real estate seminars and make sure you spend 50% of the days there on work. You can write that off, but it's more in depth than that. I really suggest the book that bigger pockets put out!

I appreciate for all the information nor ideas that everyone had given to me, I am glad i am in this forum. Everyone so very helpful here. Thank you.

Many investors buy value add properties and most of the rehab items are each under the $2500 de minimus limit...leading to large amounts of immediate tax deductions (and a tax free refinance).  Purchasing larger more expensive properties and performing cost segregation is also another big tax savings.  You don't see many BP posts discussing the after-tax return on investment but it's important.