What are the tax implications of improvements to a home that's not primary residence?

Question

How are expenses related to fixing up an investment property treated? Are they deductible? What is a qualified expense? Are they deductible from income, or only used to offset capital gains? USA rules, please. Thank you.

Answer 1

Generally speaking, if the expense is a repair (e.g. replaced broken window pane, fixed leaky roof), you can deduct it in the year paid.

If it is a capital expense (e.g. bathroom remodel, new air conditioning unit), it is added to the cost basis of the property, thus lowering the amount of capital gain (and hence the capital gains tax paid) when you sell the property.

Certain items can be depreciated over various time spans (shorter for things like appliances, longer for improvements such as room additions).

The rules are quite complex, so you should definitely consult a tax adviser.

Answer 2

If you have an investment property (I'm assuming a rental) you need to begin filing a Schedule E the year you place the property in service. The form is pretty self explanatory and the directions for it offer advice on what is expensed immediately vs depreciated over some period of time.

You must also take depreciation on the property each year, which causes your basis to drop each year. Upon sale, any recaptured depreciation or capital gains are taxed favorably, same or lower than your margin rate.