Two weeks ago, a practicing accountant asked me for help with a case. His client owns several rental properties and major renovations have been made to his depreciable rental assets. Immediately, a feeling of excitement invaded me, because this request is the ideal opportunity to analyze the concept of an expense, that of an operating or capitalizable expense.

“Oh boy, pig latin!”

“Yea”, let me explain. Expenses are made to improve your rental properties. The goal of the improvements is to generate a higher revenue base. The people who wrote the laws have no problem with that. Of course, they are wanting you to contribute to our society by ways of paying some taxes. Case-in-point, if you have a gross income of $50,000 a year and you do renovations of $100,000, you will not be paying taxes anytime soon. Therefore, that goes against the intention of the people that wrote the laws. 

As a result, many of your expenses will be added to the purchase cost of your building. Certainly, your tax deductions are not lost, in fact, they are only deferred in time. On the other hand, considering your intentions, this may not be such a “bad deal”. Let me clarify my comment: if your ulterior motive is to sell your rental property in a few years, your renovations will be added to your purchase cost and as a result, you will pay less tax when it is resold.

First, you need to analyze your expenses based on several factors specific to Tax law. Therefore, you’re going to need help, believe me. Unless you want to analyze whether your new door handles, screws, nuts and bolts are operating or capital expenses! Joking aside, it is an exercise in patience, even for the most seasoned professional. 

In turn, this body of work demonstrates compliance with our tax laws and, therefore, it may protect you in the event of an audit. In short, go ahead with your renovations and do not forget to keep your receipts. The use of an Excel spreadsheet is a relatively important tool to transmit the necessary information to your professionals.