The third post in an occasional series designed to help rental property owners get the most out of their investment

Owning a rental property can be a great investment but the financial in and outs of bring a landlord can be harder to understand, especially when it comes to tax issues. The one thing that many new landlords do wrong is fail to understand the difference, in tax man’s eyes anyway, between improving a rental property and repairing it. Get it wrong and the landlord may find themselves stuck with a bigger tax bill than they bargained for!

Rental Improvements vs Rental Repairs

Most landlords, even new ones, do know that any repairs that they make to their rental units can be offset against their rental income when they file taxes. What some do not realize is that improvements cannot. Improvements can only be added to the value of the property and could only be claimed if they sold the place as a part of their capital gains tax.

According to the tax rules spending that serves to restore a property to its previous condition is considered a repair. Spending that improves it beyond its previous condition is not. And when the term previous condition is used it means the condition the property was in when the new landlord purchased the property, not before.

That means that if you buy a new property and repair the roof right away this will be an improvement in the eyes of the taxman, not a repair. If on the other hand the roof is in great shape when you buy the property but then it develops a problem later and you repair that then it is counted as a repair and the costs can be offset on your tax return against your rental income.

Its not too hard to see how the whole thing can become confusing.

There are a few gray areas as well. If a new landlord simply updates the general decor to make the property more attractive and easier to live in than before – replaces an old, outdated stove with a new one perhaps – and makes no other changes then it may be considered a repair in some cases.

The best course of action if you are concerned about the tax implications of work you want to do on a rental property is to consult with a tax expert before you make them. They can look at your unique situation and advise you from there.