Tax Benefits to Storm Damage

It seems there are always natural disasters that may put your rental properties in a state of needing significant repairs.  Generally, for tax purposes on rentals, we track Repairs and Maintenance versus Capital Improvements for each property.  I’ve written other articles in the past detailing the differences for tax purposes.  Generally, Repairs and Maintenance are fully deductible in the year the expense occurred, versus Capital Improvements which are amortized, or spread out, over a period of time.

But what if your property gets flooded and you need to move a tenant to a hotel and get a crew in to redo drywall, flooring, and appliances?   This is treated differently when there’s flooding and such.

We always hope the insurance is going to cover these things.  Sometimes they cover it all, sometimes they don’t.  Either way, the property needs to be restored to a rentable condition.  How do we do accounting in these situations?

You may need appliances replaced, drywall replaced, electrical replaced, etc., which would normally be treated as a Capital Improvement.  However, since you’re restoring the property to safe and livable condition, you will be able to treat these expenses as “Repairs and Maintenance” allowing you to fully expense these items in the year the expense takes place.

Be sure to keep meticulous records in these situations and discuss these details with your tax professional.