Deductions

• All the money you spend to maintain, repair and improve your rental property is deductible. The IRS draws an important distinction, however, between repairs and capital improvements, which include the addition of assets. The cost of repairs is fully deductible in the year the repairs are made. A repair of exterior stairs costing $1,000 results in a $1,000 deduction in the year that repair is made. The cost of a capital improvement is deductible in part each year over the improvement's useful life until it has been fully deducted. The replacement of a roof costing $27,500 results in an annual deduction of $1,000 a year for 27.5 years, although there are other options to spread the costs over different time frames in different ways.
  
  

Depreciation Choices

• The IRS permits you to choose between two depreciation systems: GDS (general depreciation system) and ADS (alternative depreciation system). With the GDS, you can then choose either straight-line or accelerated depreciation. With the ADS, you must use straight-line depreciation. In straight-line, you deduct the same amount of depreciation over the asset's useful life. In accelerated depreciation, you deduct more of the asset's cost in the early years of service and less in later years. The IRS defines classes of useful lives, which determine the period over which you make the deductions for various types of assets.
  
  

Depreciation Rules for Appliances

• Appliances are identified by the IRS as depreciable assets. It classifies appliances as "five-year property." Under the GDS, all five-year property is depreciated over five years. In the ADS, all five-year property is depreciated over 9 years. If you are using the straight-line method in the GDS, a $1,000 refrigerator would result in a $200 deduction every year for five years.
  
  

Recordkeeping

• While the IRS does not require a specific method of recordkeeping, it does require that you are responsible for proving your right to every deduction. Keeping receipts and records of purchases for every expense is, therefore, advisable. The IRS also does not specify how long to keep records; but, in the case of assets, it recommends you keep the record for as long as you keep the asset plus three additional years.