Unlike owners of a primary residence, real estate investors can deduct fixing up expenses when a rental property is sold. Real estate tax deductions like these can help keep capital gains tax low and leave sellers of rental property with more profit.
Key Takeaways
- Expenses to fix up a rental property for sale are generally tax deductible in the year the expense is incurred.
- Common fixing up expenses for the sale of a rental property include appliance repairs, fixing faucet leaks, repairing drywall, and furnace and air conditioning work.
- Capital repairs that improve or add value to a rental property usually must be recaptured through depreciation unless the De Minimis Safe Harbor rule is used.
- Accurately keeping track of the fixing up expenses for selling a rental property can help reduce the amount of capital gains tax owed when the property is sold.
What are Fixing Up Expenses in a Rental Property?
Fixing up expenses are any repairs made to get a rental property ready for sale, such as painting or patching holes in the wall. In most cases, repairs made to a rental property are completely tax deductible the year the repair expense is incurred.
Rental property fixing up expenses are different from capital improvements that increase the value of a rental home, such as installing new carpeting or building a backyard deck.
20 Common Expenses for Fixing up a Rental Property
Getting an investment property ready for sale can be like playing a game of chess. An investor wants to make the right repairs to sell the home at the best possible sales price, while not doing more work than is necessary.
Here are 20 of the most common repair expenses to plan for when fixing up a rental property for sale:
- Appliance Repairs
Items such as burned-out light bulbs in the refrigerator or microwave, a malfunctioning heating element on a stove top, or a dishwasher that doesn’t drain properly are relatively easy and inexpensive to fix.
- Bathroom and Window Caulking
Old caulking along the toilet, bathtub, shower stall, and window frames is one of those little things that tenants usually don’t pay attention to, but will probably catch the eye of the buyer’s home inspector. When water seeps behind degraded caulking mold can occur, so it’s better to make this repair sooner rather than later.
- Bathtub and Shower Stains
One of the nice things about owning residential rental property is that tenant turnover is usually pretty low. However, bathtubs and showers can eventually stain and become discolored due to normal wear and tear. Refinishing or re-coating stained tub and tile surfaces is one high-priced option, although oftentimes a strong cleaning solution works just as well.
- Clogged and Running Toilets
Fixing a clogged or running toilet is usually pretty easy to repair. Kits to replace the entire flushing mechanism in the toilet bowl are available at the local home repair store. Unclogging a toilet may require the use of a professional plumber, but normally any blockage can be augered out fairly fast.
- Carpet Repair
Replacing the entire carpet in a rental property can be expensive, and the cost usually can not be deducted in just one year. Fortunately, carpet professionals are able to repair holes and steam clean at an affordable price. According to Thumbtack, the average nationwide carpet repair costs between $140 to $200 to patch a hole, while steam cleaning runs about $50 per room.
- Dripping Pipes
Pipe leaks frequently occur under the kitchen and bathroom sinks. Dripping pipes are usually caused by little things like a worn-out washer or a faulty connector, which can be quick and easy to replace by a handyman who knows plumbing.
- Drywall Repair
It’s not uncommon to find a small dent in the wall behind a door or scuffed drywall in the hallway or entryway. Most holes in the drywall can be patched using a kit from the local hardware store, then repainted after the patch has dried and been sanded.
- Electrical Work
Light switches and electrical sockets can malfunction due to normal wear and tear. Other electrical issues in a rental property can include flickering lights, circuit breakers that keep tripping, or sparking appliances. Even when the property is being fixed up and sold, electrical work should be taken seriously. According to the National Fire Protection Association, all electrical work should be done by a qualified electrician when buying or remodeling a home.
- Furnace Repairs
Plugged furnace filters and clogged lines are two common heating system repairs needed when a rental property is being fixed up to be sold. Even if the tenant is responsible for replacing the filters, oftentimes they forget. Landlords who schedule seasonal service on a furnace are often able to minimize any repair expense on the heating system.
- Garbage Disposal
Although a garbage disposal is an attractive amenity for many tenants, they can be a source of frustration for a landlord. They frequently clog up from things like bones or potato peels even when the property is rented to the best tenant. Stuck garbage disposals can usually be cleared by disconnecting the line, while a burnt-out motor may mean replacing the entire garbage disposal unit.
- Hot Water Issues
Poor or no hot water in a rental property can be caused by little things like a bad thermostat or a faulty temperature and pressure (T&P) relief valve, or by a water heater that is past its useful life. Rental property owners normally hire a licensed plumber to inspect and clean the system before deciding to replace the entire unit.
- Air Conditioning Repairs
Air conditioning units generally last 10-15 years, sometimes longer if the system has been properly maintained. The most common air conditioning problems in a rental property include dirty filters, thermostat malfunctions, dirty condenser coils, and mechanical wear and tear.
- Kitchen and Bathroom Exhaust Vents
Exhaust vents under the kitchen stove hood often become clogged with grease, while ventilation vents in the bathroom can eventually wear out due to moisture and dust build up. Usually repairs can be made by removing the vent cover and cleaning the debris, after disconnecting the power to the exhaust.
- Landscape Sprinkler Repair
Many single-family rental homes and small multifamily buildings have landscape watering systems in the front and back yards, and property common areas. A broken sprinkler head or broken PVC pipe are generally easy and inexpensive repairs to make.
- Mold Removal
Even in the driest of climates, mold can grow in dark, wet spaces under the kitchen or bathroom sink. While mold is usually easy to remove, it’s not something a tenant or a buyer of a rental property wants to see. According to the EPA, in most cases a moldy area of less than 10 square feet can be handled by a landlord or handyman instead of using a costly mold remediation specialist.
- Painting
Sun light, moisture, and normal wear and tear can eventually take their toll on the paint inside and outside of a rental property. Painting the entire home can be expensive, but may be well worth the cost to attract a qualified buyer for a rental property. Investors normally use neutral, off-white colors in every room of the house to make future touch-ups easier.
- Rodent and Pest Control
If the rental property has been sitting vacant for a while, the odds are that termites, rodents, or other pests may have moved in. Paying for a professional pest treatment usually isn’t too expensive, and can give the buyer of a rental property more peace of mind.
- Roof Leaks
Roof leaks can be caused by a variety of things, including worn out roofing materials, wind or hail storms, heavy snow, or a build up of debris including moss and algae. Correctly fixing a roof leak or putting on a completely new roof can be a complicated process, and investors usually hire a professional to make sure that the job is done right the first time.
- Smoke Detectors
When a smoke detector stops working, more often than not replacing the battery will solve the problem. Hard-wired smoke detector units found in many newer or updated homes usually last for about 10 years, and can easily be replaced in just a few minutes.
- Water Leaks
Leaky faucets are a common fixing up expense when selling a rental property, and are normally easy to do. Water leaks from kitchen and bathroom fixtures are frequently caused by a small rubber washer called an O-ring which seals the value. Eventually this part wears out due to normal wear and tear, and will need to be replaced.
Capital Improvements vs. Fixing Up Expenses
Fixing up expenses for the sale of a rental property can generally be deducted all at once. On the other hand, the cost of work that improves the value of a home has to be added to the property cost basis and recovered through depreciation.
However, a real estate investor fixing up a rental home for sale may still be able to deduct a major repair expense by following the De Minimis Safe Harbor (DMSH) rule from the IRS. As The Real Estate CPA explains, landlords may deduct any cost substantiated by an invoice as long as the cost does not exceed $2,500 for each item on an invoice.
How to Keep Track of Rental Property Expenses
In order to keep track of every tax deduction related to fixing up a rental property for sale, many investors sign up for a free account with Stessa. After entering some basic property and banking information, expenses are automatically tracked and categorized for easy reporting and tax preparation, and a backup trail is created.
Income reports, net cash flow statements, and capital expense reports can be generated quickly and easily at both the property and portfolio level. When tax time rolls around, the Stessa Tax Center offers a personalized tax package, along with access to a suite of tax resources created in partnership with The Real Estate CPA, a certified public accounting firm that specializes in real estate investment.
Other Expense Deductions When a Rental Property is Sold
In addition to deducting fixing up expenses for the sale of a rental property, real estate investors can also deduct a variety of selling expenses before being taxed on any capital gain.
As a recent post on the Roofstock Blog explains, sellers can deduct closing costs such as:
- Real estate commissions
- Legal fees
- Transfer taxes
- Title policy fees
- Deed recording fees
Deductions like these are subtracted from any capital gain generated from the sale of a rental property, in order to reduce the amount of capital gains tax owed.
Instead of paying tax, many investors choose to completely defer paying capital gains tax by conducting a 1031 exchange to replace the property sold with another rental property of equal or greater value.
