What Can I Deduct for a Rental Remodel?
When you own a business, you have to pay taxes on your income, but you can reduce the amount of taxable income by claiming deductions on your expenses. If you own a property that you rent out to earn income, you can deduct various expenses, such as mortgage interest, taxes, advertising, insurance, property management and remodeling.
Types
Whether you can deduct the cost of a rental remodel and how you can do so depend on the kind of remodel you carry out on the rental property. For tax purposes, you may consider remodeling activities as being either repairs or improvements. Generally, improvements refer to activities that increase the property value. On the other hand, repairs do not increase the value of the rental property, but only maintain its current value.
Repair Expenses
Repairs refer to maintenance activities such as painting the walls, changing the locks on the doors, replacing leaky roof shingles and fixing scratches on the floors. Repairs keep the rental property in good condition so it retains its value. If your rental remodel involves repairs, you can deduct these expenses in the same year as the remodel. However, these repairs have to be "ordinary, necessary and reasonable in amount" according to Nolo.
Depreciation
If you increase the property value through your rental remodel project, then it constitutes an improvement. Some improvements include adding a swimming pool, upgrading the air conditioning system, building a storage shed and changing the roof. You can't deduct the entire cost of an improvement all at once. Instead, you have to deduct a portion of the cost every year over the useful life of the improvement. Known as depreciation, this process eventually allows you to deduct the entire cost of the remodeling project.
Interest Expense
If you take out a loan to carry out a rental remodel, you can claim the interest on the loan as a tax deduction to reduce the amount of tax you have to pay. When you obtain a loan, you usually have to make regular payments to slowly pay off the entire amount and pay interest to the lender. Each payment you make consists of a portion for interest and a portion to reduce your outstanding amount. You can only deduct the interest portion of your loan payments.
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