Maintenance Write-Offs: Capitalizing vs. Deducting Expenses

IF EVERYONE KNEW THERE WERE TWO WAYS TO WRITE-OFF YOUR MAINTENANCE EXPENSES, THERE’D BE NO NEED FOR THIS ARTICLE

It’s well known, or at least it should be, that maintenance costs, when it comes to rental properties, are not the headache they seem to be because of advantages in the American tax code. Simply put, money you spend on your rental property can be deducted from your earnings to ultimately decrease your tax burden. For this reason, it is advantageous to keep up with maintenance needs and to ensure your tenants are happy. But, it’s less well known that there are actually two primary options when it comes to how you write those expenses off.

LEARN MORE: CHANGE THE WAY YOU THINK ABOUT MAINTENANCE AS A LANDLORD

WRITING OFF EXPENSES AS TAX DEDUCTIONS:

Most commonly, people tend to write their expenses off as tax deductions when it’s time to submit taxes each April. This is the right thing to do but it should really only apply to expenses that are relatively simple, temporary, or routine. For example, unclogging a drain, fixing leaky toilets, or replacing a mixing valve on a shower are all issues that need solutions and if you had to hire a plumber, it likely cost you a couple bucks. These types of fixes should be written off in this manner. That being said, if you instead renovated and replaced the entire bathroom, there’d be a more appropriate avenue.

LEARN MORE: WHY DID TAX ASSESSMENTS RECENTLY SKYROCKET?

CAPITALIZING EXPENSES:

Capitalizing the expense simply means to spread it out over the useful life of the property, rather than addressing it all in one year come tax return time. Capitalization is required of companies that make sizable investments as trying to write those off in one calendar year would be problematic. For example, Nexus’ Vice President of Franchise Sales, Greg Rice, recently purchased and is renovating Sacred Heart Church in Woonsocket, Rhode Island into 33 apartment units. This year alone, renovations totalled $4 million. To attempt to write that off as a deduction for one year just doesn’t make any sense.

Capitalization is appropriate for any type of repairs that are going to have a useful life of more than one year. While a $4 million renovation is not something most investors can relate to, let’s take the example of a $20,000 studs up renovation in an apartment. Instead of writing off 20K, you’ll need to capitalize over the useful life of the property. Typically, that figure is 27.5 years so dividing that expense over the useful life of your apartment comes out to a $727.27 deduction per year. But many owners aren’t aware of this and instead are deducting incredibly high amounts on their tax returns.

Roofing, siding, paving a driveway…any of these improvements that are meant to last for decades should be treated as the long term investments that they are and should be capitalized. Looking over your expenses and sorting them into two categories is a great first step to ensure you’re meeting tax code appropriately. Bringing that list to your accountant will help ensure you’re on the right track.

LEARN MORE: MORE ON CAPITALIZED EXPENDITURES

NEXT STEPS

It’s Nexus Property Management’s goal and responsibility to help educate property owners and prospective property owners for the sake of improving investment opportunities for all. We want more and more people to take advantage of these opportunities but we also want to see them play the game the right way. With over 1000 units under management and over two decades combined in the field, we’ve seen some things and developed time-tested best practices along the way. Contact our team to learn more or inquire about opportunities to join our team as a client or franchise owner.

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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