Rental Property Owners: Don’t Miss These Tax Benefits

by Heidi Lellman, MBA, CPA

If you’re a rental property owner, you know the need to renovate and make improvements never ends. Thankfully, there’s a relatively new tax law on the books, courtesy of the Tax Cuts and Jobs Act, that gives owners of commercial rental properties, as well as lessees of commercial real estate, a significant tax benefit when making certain building improvements or repairs. Owners of residential rental properties can take advantage of similar tax benefits, too.

Here’s what you should know about these benefits, and why you may want to move forward with your renovation or repair plans ASAP.

What commercial rental property owners should know

Thanks to the new tax law, commercial rental property owners and lessees (i.e., owners and certain lessees of any Section 179 property) can now write off the total cost of qualified improvement property up to $1 million (to be adjusted for inflation) in the year the asset is placed in service.

“Qualified improvement property” includes the building’s interior and, thanks to the new tax law, roofs, HVAC, fire protection systems, and alarm and security systems.

A few caveats exist. Interior improvements that include enlargements to the building, an elevator or escalator, or anything considered structural do not qualify. The phase-out threshold for the deduction runs between $2.5 million and $3.5 million. This means if the total cost of your improvements surpasses the $2.5 million threshold, your deduction will be reduced dollar for dollar. If your total cost of improvements is greater than $3.5 million, you won’t be able to expense a single dime of it. There are net income requirements to pay attention to as well.

What residential rental property owners should know

Although the new tax law didn’t change how residential rental property owners can deduct improvements and repairs, it’s worth revisiting the rules.

Generally, there are two types of improvements and repairs that can be expensed immediately—and they aren’t limited to a building’s interior.
1. Expenditures of $2,500 or less per item or invoice
2. Routine maintenance (i.e., expected to be done more than once in a 10-year period)

To take advantage of the rules, consider asking your vendors to invoice separately or itemize expenses in a way that helps you stay under the $2,500 threshold. For instance, we recently worked with a client who put in new landscaping at a residential rental property. Instead of lumping the cost of the trees into a single line item, the contractor indicated the cost per tree on the invoice.

Additional considerations

The deduction must be taken in the year the asset is placed into service. This means if you start a project in October 2019 but don’t finish it until February 2020, you won’t be able to write off the expense until 2020.
It’s important to consider these tax benefits when planning a project, especially if it’s for a commercial rental property. Depending on the size of your project, you may want to limit the amount of work you do each year—for example, one floor at a time if it’s a major renovation—to avoid surpassing the phase-out threshold.

Being able to write off the cost of improvements and repairs to your rental building is a substantial tax benefit, so it’s worth asking yourself this question. If you’re thinking of doing a repair or renovation yet this year, we can help you determine the amount you can deduct and plan for the most advantageous tax treatment. And if you’ve already completed improvements in 2019, we’d be happy to review your project invoices to make sure you’re prepared to file for the deduction. Time is of the essence, so don’t put off those projects! Contact us today if we can answer questions or help in any way.

Additional Articles of Interest:

How Rental Property Owners Can Qualify for the 199A Deduction