Tax Write-offs for Renovating a Rental Property

Depreciable Expenses

• For the most part, the costs associated with rental property renovations cannot be fully deducted during the tax year the renovations took place. Instead, these expenses must be depreciated over time. For example, if you extend the life of your property by making renovations, you must depreciate those costs over 27 1/2 years for residential properties and over 39 years for nonresidential properties. This is why many landlords try to keep their properties updated as they go along instead of doing a complete renovation all at once.
  
  

Interest

• Even if your renovations cannot be fully deducted during the current tax year, you may be able to fully deduct any interest you paid on the loan you took out to complete the project. However, there are limitations as to the interest that can be deducted. For example, if you use a credit card to complete the project, the interest won't be deductible. In order to be eligible, you must borrow the funds in the form of a home equity loan, or home equity line of credit.
  
  

Repairs

• While the costs of major renovations must be depreciated over time, the costs of some repairs can be written off during the current tax year. The rule is that these repairs must be ordinary, necessary and reasonable. Common acceptable repairs that can be fully deducted include painting, fixing floors, gutter repair, fixing leaky pipes, plastering and replacing broken doors and windows. As a general rule of thumb, deductible repairs are those that are considered routine maintenance, while the repairs that need to be depreciated are considered upgrades and improvements to the property.
  
  

Energy Efficiency Credits

• If you install certified energy-efficient products as part of your renovations, you may be eligible to claim certain energy-efficient tax credits. Common energy-efficient products used in rental properties include appliances, doors, windows, heaters, air conditioners and insulation. According to the IRS, in 2009 and 2010, the approved tax credit was $1,500 maximum, or 30 percent of the total purchase price. As of 2011, the tax credit is reduced to a maximum of $500, or 10 percent of the total purchase price.