Can You Deduct Maintenance Fees on Rental Property?
Properly classifying rental property expenses is crucial for tax purposes. Learn the distinction between repairs and improvements to accurately manage your deductions.
Yes, maintenance fees on a rental property are tax-deductible. The Internal Revenue Service (IRS) allows landlords to deduct expenses that are “ordinary and necessary” for managing and maintaining a rental property. These deductions lower your taxable rental income. To qualify, the costs must be directly related to your rental activity and intended to keep the property in good operating condition.
Qualifying Maintenance and Repair Expenses
An ordinary expense is one that is common and accepted in the business of renting property. A necessary expense is one that is helpful and appropriate for your rental business; it does not have to be indispensable to be considered necessary. These expenses are for the upkeep of your property and do not add significant value or extend its life.
These costs keep the property in its current state. Common deductible repairs include:
- Painting a room
- Fixing a plumbing leak
- Repairing a broken window
- Replacing smoke detector batteries
- Paying for pest control services
- Routine landscaping, like lawn mowing
These repairs are considered short-term fixes. For instance, if a tenant damages a section of drywall, the cost to patch and paint that area is a repair. If a faucet is leaking, the cost of the plumber’s visit and the parts to fix the leak are also deductible in the current year.
Understanding Capital Improvements
A clear line exists between a repair and a capital improvement. While repairs are currently deductible, improvements are handled differently. An improvement is any expenditure that adds value to your property, prolongs its useful life, or adapts it to new uses. These costs cannot be deducted in full in the year they are paid.
Instead of an immediate deduction, the cost of a capital improvement is recovered through depreciation. This means you deduct a portion of the cost over several years. For residential rental property, the standard depreciation period is 27.5 years. This reflects the long-term benefit the improvement provides to the property.
Examples of capital improvements include:
- Replacing an entire roof, as opposed to patching a leak
- Adding a new bathroom
- Completing a full kitchen remodel
- Installing a new central air-conditioning system
- Paving a driveway for the first time
These projects are investments that enhance the property’s value.
Essential Record-Keeping for Your Deductions
To claim deductions for maintenance and repairs, you must have records to support your claims. The IRS requires you to prove your expenses if your return is audited. Without proper documentation, you risk having deductions disallowed, which could lead to additional taxes and penalties. Your record-keeping system should be organized and consistently maintained throughout the year.
Your documentation should include proof of each expense, such as dated receipts, contractor invoices, and canceled checks. Bank and credit card statements can also serve as evidence. For each expense, your records must show the amount paid, the payment date, and a description of the service or item.
It is a good practice to digitize your records by scanning receipts and saving them electronically to protect against loss or fading. For significant repairs, taking before-and-after photos can provide visual evidence of the work performed.
Reporting Expenses on Your Tax Return
After gathering your records, you must report expenses correctly on your tax return. The primary form for reporting income and expenses from rental real estate is IRS Form 1040, Schedule E (Supplemental Income and Loss), where you will detail your rental activity.
On Schedule E, you list your total rental income and subtract your expenses to determine your net rental income or loss. Maintenance and repair costs are entered on the line for “Repairs.” Other expenses, such as insurance and property taxes, have their own dedicated lines.
It is important to accurately categorize your expenses on the form. Do not include capital improvements on the “Repairs” line. These are accounted for separately through depreciation, which is calculated on Form 4562, Depreciation and Amortization. The total depreciation deduction is then carried over to Schedule E.