Investment property owners and landlords know that tax deductions are a very important part of making sure they maximize their returns. Last year the IRS implemented a somewhat complex distinction as to what constitutes a repair versus improvement. Repairs can be deducted in a single year. So if you have a $1,000 repair, you can deduct it at one time. If it’s an improvement, the $1,000 worth of work may need to be depreciated over several years.
So how do you know what category you fall under? One useful test for understanding if a deduction can be taken in a single year is whether or not it falls outside of the “Betterment, Adaptation, or Restoration” assessment. If the work falls under these categories, they’ll need to be depreciated, not deducted in a lump sum.
If the need for the expense was caused by a particular event–for example, a storm–you must compare the property’s condition just before the event and just after the work was done to make your determination. On the other hand, if you’re correcting normal wear and tear to property, you must compare its condition after the last time you corrected normal wear and tear (whether maintenance or an improvement) with its condition after the latest work was done. If you’ve never had any work done on the property, use its condition when placed in service as your point of comparison.
For a detailed look at what constitutes a betterment, adaptation, or restoration, take a look at this handy article or call Helen today at 847.967.0022 or email [email protected].