The first has to do with all the deductions real estate investors can get: mortgage interest; business expenses, such as property management, office, mileage, travel, educational events, etc.; repairs; and improvements made that increase your property’s value. All of these can be immediately deducted, with the exception of improvements, which are depreciated over time. Jeff Rohde writes about 100% bonus depreciation deduction in real estate that ends in 2022 Bonus depreciation deduction for property improvements was increased from 50% to 100% by the Tax Cuts and Jobs Act of 2017 (TCJA) and will be available through the 2022 tax year, then gradually decrease until it expires at the end of the 2026 tax year. For example, if an investor spends $10,000 on an improvement, the entire cost of the improvement can now be deducted as a bonus depreciation expense in the tax year the cost was incurred. Before claiming any type of depreciation expense in real estate, it’s important to understand the difference between a repair and an improvement. Repair vs improvement A repair is something that keeps a rental property in its original condition, such as fixing a leaky sink or detail cleaning a home to make it ready for the next tenant. Repairs are deducted from gross rental income the same tax year that the repair is made. On the other hand, an improvement is something that betters, adapts, or restores a property. Unlike a repair, the cost of an improvement must be depreciated and expensed according to the depreciation schedule provided by the IRS. A good way to think about the difference between a repair and improvement is by using the acronym BAR:
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