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Real Estate Investor Series: Building Improvements vs Repair and Maintenance

Real Estate Investor Series: Building Improvements vs Repair and Maintenance

Did you make any improvements or repairs to your property during the year?

Do you know when you can expense in the current year or need to capitalize and depreciate over a number of years?

Often time in taxes, it is “facts and circumstances” that determine the correct answer. This often requires a simple conversation with your tax preparer.

In general, you can expense all routine maintenance. This is defined as a recurring activity that occurs more than once in an asset’s class life.

In general, you must capitalize all betterments, adaptations and restorations. In our case, restoration is a process that returns an asset from major disrepair and restores it to usefulness. Adaptation or betterment might mean an expansion.

Many times, I have seen tax preparers use the easiest route, which would be to capitalize on the improvement and to depreciate that over the life of the building (27.5 years for residential property and 39 years for commercial property). Is that the best answer? No!

The correct approach is to have a conversation with your tax preparer to go over the improvements and classify them into the proper asset classes. Many of the improvements may fall into shorter life categories such as 5, 7, or 15-year property. Depreciating an asset over 5 years vs 39 years will give greater depreciation and tax savings in the short term.

In addition, current law allows for bonus depreciation on assets with a tax life of 20 years or less. Bonus depreciation is a concept that has come and gone to various degrees over the years. Which bonus applies to you depends on the year placed in service.

Here is what it has looked like over recent years and what it will look like in future years:

Sept 27, 2017 - Dec 31, 2022


Jan 1, 2023 - Dec 31, 2023


Jan 1, 2024 - Dec 31, 2024


Jan 1, 2025 - Dec 31, 2025


Jan 1, 2026 - Dec 31, 2026


Previously, bonus depreciation was only allowed for “original use,” meaning the first-time buyer. Later the law was amended to include used assets.

What does 60% bonus depreciation look like for a 5-year asset in real practice?

Let us say we determine the cost of carpeting to be $20,000. You would get a first-year write-off of $13,600 (Bonus depreciation of $12,000 ($20,000*60%) plus regular depreciation on the remaining tax basis of $1,600 ($20,000*40%*20%). Without separating the carpeting, this would be written off over 27.5 years in a residential setting for $394 in first-year depreciation.

Is your tax practitioner asking you the right questions? Are you taking advantage of tax laws and opportunities allowed to you?

Please reach out to one of our professionals if you are a real estate investor and are looking for other ideas.

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Biz Tip Topic Expert: Craig Maternowski, CPA

Craig Maternowski, CPA

Craig is a Principal with SVA Certified Public Accountants and works closely with business owners and their management teams to advise them on accounting and tax issues.

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