How do I track property improvements and repairs?

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How do I track property improvements and repairs?

You can and should track any improvements and repairs you make to a property by using your Money account and category information. However, the steps you take to record improvements to a property and the steps you take to record repairs to a property actually differ.

Recording Capital Improvements

In the case of a capital improvement, you can’t legally charge off the cost of making the improvement as a deduction. In other words, you can’t include the cost of improving your property on your Schedule E as an expense. Rather, you need to add the cost of the improvement to the cost basis of the property. To do this, you record the check in the usual way but with one significant difference. Rather than categorize the check as falling into some expense category, you record a transfer transaction. The transfer transaction moves money from your checking account to the property’s asset account.
By recording a transfer transaction, you reduce the balance of your checking account for the effect of the check. And you bump up the value or cost of the asset for the improvement.
The first line of the register shows the opening balance, which is actually the original purchase price of the property. The second line shows the cost of the new roof improvement. This improvement adjusts the cost basis of the property.

Recording Capital Repairs

Repairs, in contrast, work just like any other expense. If a repair doesn’t significantly extend the life of a property, you simply use an appropriate real estate expense category for categorizing the check. The Schedule E shown earlier in this chapter includes a maintenance expense category. You probably use this to record any repairs you make as long as the repairs are not considered improvements.

How do I track depreciation on a real estate investment?

You can use Money to record the depreciation expense you have charged for a real estate investment. To do this, display the real estate asset’s account register. Then record expense transactions in the register equal to the amount of depreciation calculated for a year. The expense category you use to categorize such transactions is a real estate depreciation expense category. The depreciation expense transaction reduces the account balance
of the asset account for the depreciation expense reported for the year.

You typically would not calculate the depreciation expense yourself. This value is calculated by looking up a depreciation factor in a table that is available in federal and state revenue agency publications. The rules for looking up the appropriate depreciation factor involve looking at the type of property you are depreciating, the date you originally put the property into service, the month of the year you put the property into service, and the number of years you have already depreciated the property.
Because the rules are complicated, most real estate investors get this information from their tax advisors. You will probably want to do so, too.

NOTE If you do want to make depreciation calculations yourself, you can obtain publications from the IRS that explain how to do this. You can also obtain any tax form or publication from the IRS web site at http://www.irs.us

Article Source: http://articlenexus.com

CPA Stephen L. Nelson is the author of do it yourself kits for Incorporating in Tennessee, Tennessee S corporation, and Tennessee limited liability company.

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