Can I Deduct Renovation Costs For My Rental Property?

Remodeling a rental property can add value and generate extra income, but it’s crucial to understand which expenses can be deducted on your taxes. The expenses to remodel should be capitalized and depreciated rather than deducted all at once. If the property was rented for the first year, you can deduct remodeling expenses as a business expense on your tax return.

Renovation can pay off by attracting higher rents and greater demand, and unlocking tax deductions that put cash back in. Landlords can deduct most ordinary and necessary expenses related to renting residential property, such as rental property tax deductions for use of a car, cleaning costs, and mortgage interest.

The safe harbor for small taxpayers (SHST) allows landlords to currently deduct all annual expenses for repairs, maintenance, improvements, and other costs for rental properties. However, there is no law that says that if something in your rental property is broken, it has to be replaced. A replacement is almost always an improvement, not a repair.

To deduct renovation costs, you must depreciate major improvements over time rather than deducting them all at once. Once the rental is “placed in service” (made available for rent), you can deduct those expenses.

Real estate owners can typically deduct property tax, insurance, interest, condo fees, repairs, utilities, and other related costs. However, the cost of labor for remodeling your rental property can only be deducted if you hire a professional to do the work.

In summary, remodeling expenses for rental properties can be deducted as business expenses, but they must be capitalized and depreciated over time.