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Tax Talk with George Saenz

Ask the tax adviser

Writing off rental repairs

Dear Tax Talk:
I recently purchased a home out of state. I intend to rent it for two years, then retire and move into it. While it is a rental property before I move in and make it my residence, is there any tax benefit from making numerous repairs and remodeling the house?

Dear Vic:
Normally, when you rent out a piece of property you can claim the associated expenses as a deduction against rental income.

Most rentals generate tax losses that can be used to offset other income from salaries and such if your adjusted gross income is no more than $150,000. If you exceed the income limit, these losses are carried forward until you can utilize them either by a drop in income such as at retirement or the sale of the property.

Repairs such as painting, fixing leaks and flooring are not required to be capitalized and depreciated unless they are in connection with an overall plan of remodeling the home. Therefore, repairs can be deducted against current income.

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Extensive remodeling such as overhauling kitchens and bathrooms or roofing are required to be depreciated. Since the recovery of these costs varies from five to 27 years, you may not get a lot of benefit for these expenses. More information on depreciation of improvements and expensing of repairs is available in Internal Revenue Service Publication 527.

An overriding consideration in claiming net losses from the rental activity is if the activity is engaged in for profit. Since your intention is to ultimately use the property as your retirement home, the IRS could claim that the net losses are not allowable as the rental is not engaged in for profit. You should weigh this consideration with your accountant.

-- Posted: May 13, 2003

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