1.5 Employ Strategies to Reclassify Rehab Improvements into Fully Deductible Repairs.
There are three major tax-saving benefits of classifying expenditures as repairs rather than capital improvements.
One of them is immediate tax savings. For example, the owner of a rental property is in a 31% tax bracket and pays $20,000 as a repair is an immediate deduction which is worth $6,200 in tax savings. But if the $20,000 is capital “punishment” it must be written off over 27-1/2 years = an annual deduction of about $720 a year = tax savings of only about $200 in the first year. A difference in immediate tax savings of $6,000!
These tax savings could be used as an immediate source of down payment monies for another income-producing real estate.
There are over 20 tax saving ideas to convert capital improvements into fully deductible repairs! Let me share some of them with you.
Componentized improvements – Just as a big forest is made of many smaller separate trees, so is an extensive plan of improvements made up of a series of smaller, separate repairs. That is, much work resulting in the “permanent improvement” to a property, in essence, consists of a series of “separate repairs”. Such repairs could be immediately deductible if documented separately.
Otherwise, they will lose their nature as repairs if they are part of a general plan of improvement or reconditioning. You, therefore, need to componentized or fractionalize the large expenditures into a larger number of smaller repair categories. Do this with separate invoices for each repair job.
Documents (such as bills & contracts) should be worded as “repairs” – Use such words as: “repairs”, “prevent damage”, “patch”, “temporary”, “incidental”, “minor”, “fix”, “piece meal”, “annual”, “less than a year”, “decorating”, “painting”, “small”, etc. Also, the prefix “re” is effective. For example, “repaint”, “rematch”, “repaper”, “recoat”, “resurface”, “redo”, etc. These have been in the taxpayer’s favor in deciding that expenditures were repairs. Do the above and put more tax-saving dollars in your pocket!
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