Is New Flooring Tax Deductible for Homeowners and Rental Properties?
Understand how flooring expenses may impact your taxes, including key distinctions that affect deductibility and long-term financial planning.
Replacing or upgrading flooring represents a considerable investment for property owners. Whether prompted by wear, a desire for aesthetic updates, or preparing a space for tenants, the expense often leads to questions about potential tax benefits. How these costs are treated by the Internal Revenue Service can impact your finances through immediate deductions or long-term depreciation.
For homeowners, the cost of new flooring is generally considered a non-deductible personal expense. However, if the flooring qualifies as a capital improvement, it increases the home’s cost basis. This adjusted basis can reduce the taxable capital gain when the home is eventually sold.
For rental property owners, flooring expenses are treated differently because they relate to an income-producing activity. Understanding the specific tax rules is necessary for accurately reporting income and expenses.
Determining If Flooring Is a Repair or Improvement
The tax treatment of flooring costs hinges on whether the work is classified as a repair or an improvement. Repairs maintain a property’s condition, addressing wear or damage without significantly adding to its value or prolonging its life. Fixing a few cracked tiles or patching damaged hardwood typically falls into this category. Costs for repairs on rental properties are generally deductible as business expenses in the year they are incurred.
Improvements, conversely, enhance the property’s value, extend its useful life, or adapt it to a new use. The IRS often uses criteria sometimes referred to as the “BAR” test, outlined in Treasury Regulation Section 1.263(a)-3, to identify improvements. An expense qualifies if it results in a Betterment (ameliorating a defect, adding capacity, or increasing quality), an Adaptation (changing the property’s use), or a Restoration (rebuilding or replacing a major component).1Internal Revenue Service. Tangible Property Final Regulations
Replacing flooring throughout a property or even in a single room is usually considered an improvement. It generally enhances value and extends the flooring system’s useful life. Upgrading materials, such as replacing basic carpet with hardwood, is typically seen as a betterment.
Minor flooring work, like patching small areas, might be classified as a repair if it merely maintains the existing condition. However, if these minor tasks are part of a larger renovation project, the entire job, including the floor work, might be treated as a single improvement. Evaluating the scope, cost, and purpose against IRS definitions is essential.
Depreciation Factors
When new flooring in a rental property is classified as an improvement, the cost is not deducted entirely in the year paid. Instead, it is capitalized—added to the property’s cost basis. This cost is then recovered over time through annual tax deductions called depreciation, reflecting the asset’s gradual wear or obsolescence.
The Modified Accelerated Cost Recovery System (MACRS) is the primary method used for depreciating tangible property placed in service after 1986. Under MACRS, improvements to residential rental property, like new flooring, are generally treated as part of the building structure.
The recovery period for residential rental property under the MACRS General Depreciation System (GDS) is 27.5 years, as specified in IRS Publication 946, How To Depreciate Property.2Internal Revenue Service. Publication 527, Residential Rental Property The cost of the flooring improvement is spread out over this timeframe using the straight-line depreciation method, which results in equal annual deductions. For instance, an $11,000 flooring improvement would yield an annual depreciation deduction of $400 ($11,000 / 27.5 years) for each full year the property is in service.
Depreciation calculations also involve a convention determining deductions in the first and last years. For 27.5-year property, the mid-month convention applies. This treats property placed in service or disposed of during any month as occurring mid-month. Consequently, only a partial year’s depreciation is claimed in the first and final years, based on when the flooring was ready and available for use. The total depreciation taken reduces the property’s adjusted basis, affecting the calculation of gain or loss upon sale.
Rental Property Considerations
For rental properties, flooring costs directly impact the net profit or loss reported on Schedule E (Form 1040), Supplemental Income and Loss. As noted, repairs are typically deductible in the current year, reducing taxable rental income. Improvements are capitalized and depreciated over 27.5 years.
The IRS offers certain safe harbor elections that may allow landlords to deduct costs that would otherwise require capitalization. The De Minimis Safe Harbor Election, under Treasury Regulation Section 1.263(a)-1(f), permits the deduction of smaller expenditures. For taxpayers without an applicable financial statement (AFS), this allows deducting items costing up to $2,500 per invoice or item (as substantiated by the invoice).3Internal Revenue Service. Notice 2015-82: Increase in De Minimis Safe Harbor Limit With an AFS, the limit is $5,000. This election, made annually with a timely filed tax return, could apply to flooring costs below the threshold.
Another option is the Safe Harbor for Small Taxpayers (SHST). This allows qualifying taxpayers (generally those with average annual gross receipts of $10 million or less) to deduct all annual expenses for repairs, maintenance, and improvements for an eligible building property (generally one with an unadjusted basis of $1 million or less).
Under the SHST, the total amount paid during the year for these expenses cannot exceed the lesser of $10,000 or 2% of the building’s unadjusted basis. If a landlord’s total annual expenditures, including flooring, stay within this limit for a qualifying building, the entire amount can be deducted currently. This election also requires an annual statement filed with the tax return. Utilizing these safe harbors can offer significant tax advantages for qualifying rental property owners.
Documentation Requirements
Maintaining thorough records is essential for substantiating any tax claims related to flooring expenses. Taxpayers must keep records sufficient to establish the amounts reported on their tax returns, according to Treasury Regulation Section 1.6001-1.4Cornell Law School Legal Information Institute. 26 CFR § 1.6001-1 – Records
Key documents include invoices, detailed receipts for materials, and proof of payment like cancelled checks or bank statements. These should show the date, amount, vendor, and a specific description of the work or materials. For flooring, specifying the type and area covered is helpful. If part of a larger project, itemized costs for flooring simplify allocation.
Records supporting repairs or expenses deducted under safe harbors should generally be kept for at least three years from the date the tax return was filed or due, whichever is later.
For flooring classified as an improvement, documentation proving its cost must be kept for as long as you own the property, plus several years after its sale (typically three years after filing the return for the year of disposal). This is necessary to correctly calculate depreciation over the years and determine the property’s adjusted basis for calculating gain or loss when sold. These records are needed if the IRS examines your return.