To improve or make additions to a rental property, the improvement or addition must be treated as a separate depreciable property.
Then the improvement or addition must decrease in value over their useful life and not be deducted in the year paid. A non-rental or residential home improvement can be added to the basis of the home to help reduce the gain, if any, when it is sold.
An improvement of course will add to the value of a property and will draw out the useful life of that asset.
Improvements and additions can include the following: bedrooms, bathrooms, decks and a garage. They can take in a porch or patio, the lawn and grounds, any landscaping, a driveway or even a walkway fence or retaining wall. A sprinkler system, swimming pool, storm windows or doors, and a new roof can be incorporated as well. Wiring upgrades, a satellite dish or security system, any heating or central air conditioning system, a furnace, simple duct work, or a complex central humidifier filtration system can be counted.
A pluming septic system, a water heater or soft water filtration system, and any other interior improvements such as built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, insulation, attic walls, or even floor pipes can be involved.
The cost of any improvement made to a property must be capitalized. That capitalized cost can then be generally depreciated like the improvement was a separate property.
It is important to note the difference between an improvement and a repair. A repair will keep the property in good operating condition, and does not materially add to the value of the property or substantially make its life longer.
An example of a repair includes fixing a leak, replacing a broken window, painting, or fixing the gutters. The cost of the repair can be deducted as a rental expense, and it does not add value to the property.
Fixing a small section of one corner of the roof of a rental property is a repair. The cost of the repair may be deducted as a rental expense. However, if the roof was completely replaced, the new roof is now an improvement because it has increased the value and lengthened the life of the property. The cost of the new roof may depreciate.
Be sure to separate and keep accurate records of the cost of repairs and improvements. The cost of improvements will need to be declared when the property is sold and depreciate.
If an improvement to the property is made, the cost of the improvement must be capitalized. Then that capitalized cost is treated like the improvement was a separate property.
An improvement to rental property can be depreciated like the permanent improvements made to a business property rented from someone else.
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Source: http://www.propertymanagementexecutive.com/?p=4277
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