- The Internal Revenue Service defines an improvement as something that will last longer than one year. If it is an improvement that won't last that long, the IRS classifies it as maintenance. While there is a gray area between these two categories, the IRS does provide a list of many of the improvements that have a "useful life" of more than a year. Everything else can generally be included in the other category. Improvements with less than a one-year life can be fully written off in the year they are made. Painting is usually included in this category. One hundred percent of your painting cost is considered a business expense on a rental property and can be subtracted from property rental income. Better still, in most cases when expenses exceed income on the property, you can subtract some and sometimes all of the resulting loss from your other earned income.
- Any improvement with a useful life of more than one year that is subject to wearing out or becoming obsolete can be depreciated. Depreciation is a method of recovering business costs over time. On a rental property, the building itself is depreciable, as are each of the improvements. Several depreciation methods can be used, but the most common is the straight-line depreciation system. Under this method, a building is depreciated over 27.5 years. Each component that was separately improved is also depreciated over its own time frame. The IRS provides a list of improvement classes with its assessment of useful life duration. Appliances, for instance, are assigned a five-year depreciation under this system. If the appliance cost $500, you would show a $100 expense for its depreciation each year for five years.
- The IRS allows you to write off every expense associated with your rental property that is both ordinary and necessary to run your rental business. It explicitly includes advertising, cleaning, commissions, insurance, mortgage interest, repairs, tax return preparation fees, travel expenses, utilities and postage. Just because an expense is not listed in one of the IRS' publications does not mean you cannot claim it. Rather, you must document the expense and be prepared to make your case should you be audited.
- Claiming expenses is easy. Proving them takes some degree of organization and discipline. Keep records. You might need to show them to prospective buyers, who may ask to see your documents to verify new improvements are truly new and to determine what likely maintenance costs are. You might also need the documents to prepare your taxes. You are required to prove every expense you claim, and if you're audited and can't do it, expect a truckload of problems that could extend back into prior tax years and forward into the future. The IRS points out that federal law does not specify the type of records required but, rather, expects records to clearly demonstrate both income and expenses.
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