Repair Expenses vs. Improvement Costs - Palma Financial
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Repair Expenses vs. Improvement Costs

by | Nov 6, 2023 | Improvement Costs, Repair Expenses

Repair expenses are essential upkeep tasks that can be deducted in the same year, while improvement costs must be depreciated over the years. It means that repair expenses provide a game-changing upfront tax advantage.

Examples:

Repair expense: Fixing a leaky roof

Improvement cost: Adding a new wing to your building

  • If you invest $30,000 in roof repairs, you can deduct the entire amount in the current year.
  • Suppose you invest $30,000 in a new building wing. In that case, you must depreciate the cost over 27.5 years for residential property (or 39 years for commercial property), resulting in only a fraction of the cost being deducted annually.

But here’s the twist…

Repair expenses are also immune to recapture taxes, which can be triggered when you sell a property for a profit after prior depreciation. By classifying expenses correctly today, you can unlock immediate savings and protect your future financial prosperity.

How to differentiate between repair expenses and improvement costs:

  • Purpose: Repair expenses maintain the status quo, while improvement costs elevate or extend property life.
  • Cost and scope: Repair expenses are budget-friendly and typically one-time, while improvement costs are usually substantial and ongoing.
  • Impact: Repair expenses ensure property functionality, while improvement costs add significant value.

Property depreciation:

  • Commercial property assets can be depreciated over 39 years straight-line, per the U.S. Tax Code.
  • Residential property assets follow a 27.5-year straight-line depreciation.

Classifying repair expenses, improvement costs, and property depreciation is a big deal for your business. It can save you money now and in the future and help you build a solid financial foundation.

Schedule your FREE Tax Assessment today by clicking here, replying to this email, or calling us at (408) 708-9330.

P.S. Remember! Repair expenses are maintained while improvement costs are enhanced. Repair expenses are budget-friendly necessities, while improvement costs are visionary investments.