Property improvements that provide multi-year tax deductions

January 04, 2023

PadSplit is committed to helping hosts get the most value from their investments while providing affordable housing for our members. When converting a property into a co-living space, hosts should consider renovations that may increase energy efficiency and reduce maintenance occurrences.

Capital improvements reduce tax liability for multiple years

Capital improvements are projects done to improve the property beyond the original condition. Capital improvements add value and extend the life of the rental property. Hosts can recover the cost of their investments through yearly tax deductions called depreciation, which helps them provide affordable housing while maximizing returns. Proper renovation upgrades are often beneficial for utility savings and tax deductions.

What are some common capital improvement projects?

Here are some projects to consider that our network of vendors can help you complete:

•   New flooring or carpeting

•   Kitchen renovations

•   New high-efficiency HVAC systems

•   Energy-efficient windows

•   New roof installation

•   Solar panels to save on utility bills

The cost of these improvements is recovered by taking depreciation over 27.5 years. To calculate depreciation, the cost of the project is divided by 27.5. The resulting dollar amount will be the tax deduction applied for 27.5 years.

Why are capital improvements beneficial?

•   Increase property values

•   Increase energy efficiency

•   Make the property more comfortable

•   Reduced taxes for multiple years

Any improvement to the property will reduce future tax liability and immediately increase the property value should you decide to sell. Upgrades to windows, HVAC systems, or solar panel installations can save on utility bills. Capital improvements benefit PadSplit members by making the space safer and more comfortable. With a safe, comfortable, and affordable property, PadSplit members will want to stay longer.

Additional depreciable expenses

In addition to the capital improvement depreciation, there are several other items that use depreciation to lower tax liability.

•   Stoves – depreciated over 5 years

•   Refrigerators – depreciated over 5 years

•   Furniture – depreciated over 5 years 

•   Window AC units – depreciated over 7 years

•   Fences – depreciated over 7 years

The IRS has a complete list of allowable deductions, and a good CPA is valuable for first and longtime PadSplit hosts. It is important to track and record all expenses for the property. While repair and maintenance costs are deducted on the year the work is performed, capital improvements are depreciated over several years. With a good mix of depreciation and deductions tax liability can be minimized to increase profits.

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