Can I deduct the cost of replacing carpet in the room I rent on HomeAway?

Tax deductibility of buying new carpet and making improvements and repairs in short-term rentals.

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Question

I rent a bedroom in my house on HomeAway, and I plan to replace the carpet in this room. Is this tax deductible?

Answer

When you rent out a room in your home, you become a landlord and are entitled to deduct or depreciate your landlording expenses. Among these are the cost of improvements and repairs to the space you rent out. Repairs are currently deductible--that is, the entire cost can be deducted in a single year. On the other hand, improvements must be depreciated--that is, deducted a portion at a time over several years.

The difference between an improvement and a repair is that an improvement makes your property much better than it was before, restores it to operating condition after it has fallen into disrepair, or adapts it to a new use. A repair keeps your rental property in good operating condition, but does not materially add to the value of your property, substantially prolong its useful life, or make it more useful.

It’s well settled that replacing an entire carpet in a rental property is an improvement, not a repair. In contrast, mending a hole in a carpet is a currently deductible repair.

You’ll have to depreciate the cost of the carpet over the property’s useful life. The time period you have to depreciate a carpet in a rental depends on whether it is classified as personal property or part of the building structure. If the carpet is tacked down, it is classified as personal property and is depreciated over five years. But if the carpet in a residential rental property is glued down, it is considered to be part of the building structure and must be depreciated over a whopping 27.5 years.

Today, most carpets are tacked down, and qualify as personal property with a five-year deprecation period. You have the option of deducting the cost using straight-line depreciation, in which the same amount is deducted each year, or accelerated deprecation in which more is deducted in the first years you own the property and less in the later years. Your total depreciation deduction is the same whichever method you use. But most people like to use accelerated depreciation to get as large a deduction as soon as possible.

When determining the amount to depreciate, you include not only the cost of the carpet, but installation charges as well.

For more detail on this subject, see the Nolo article Repairs vs. Improvements. For related articles, see the Tax Deductions for Landlords section of this site.

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