Claim Rental Upgrades on Taxes
If you rent out your property as a form of income, the Internal Revenue Service (IRS) expects you to report that income on your taxes using Schedule E. However, the IRS does allow you to take certain tax deductions for expenses that you incur from your rental property, including repairs and upgrades. Repairs are expenses that keep your property in rentable condition, like fixing a broken air conditioner, and can be deducted in the year you incur them. Upgrades are expenses that add value to your rental property, such as adding on an additional room, and must be deducted over the life of the property.
Instructions
1. Determine the amount of money you spent on the upgrade. For example, if you spent $10,000 on a new kitchen, your expenses would be $10,000.
2. Complete section III of form 4562 to determine how much of your expense you can deduct for that year. For example, if you upgraded the kitchen, a residential rental property expense, you would list that on line 19h.
3. Determine the percentage you can deduct for the first year by multiplying the number of months the item was in service by 0.0030303. The number 0.0030303 comes from dividing 100 by the life expectancy of residential improvements, 27.5 years, and dividing the result by 12 to find the depreciation per month as a percentage then dividing by 100 to convert it to a decimal. In future years, you will be able to deduct the annual deprecation percentage, or 3.6363636 percent per year.
4. Multiply the percentage found in step 3 by the cost of the rental upgrade and write this amount on line 19h, column g. For example, if the upgrade was only in service 1 month, you would multiply $10,000 by 0.0030303 to find you could deduct $30.30.
5. Write your total deductions on line 22 of form 4562 and copy this amount to line 20 of your schedule E for your rental property income. This amount will decrease the taxable amount of your rental property income.
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