I rent a bedroom in my house on HomeAway, and I plan to replace the carpet in this room. Is this tax deductible?
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.
Unless one of the exceptions described below applies, you’ll have to depreciate the cost of the carpet over the property’s useful life. 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 can deduct the cost of replacing a carpet in a single year if one of the following special rules applies:
De minimis safe harbor: Any item you purchase for your landlord activity that costs $500 or less, as shown in the invoice, may be deducted in a single year by using the de minimis safe harbor rule. You must file an election with your annual tax return to use this rule.
Safe harbor for small taxpayers: The safe harbor for small taxpayers permits smaller landlords, those with rental buildings that cost $1 million or less, to currently deduct up to $10,000 in improvements each year.
Routine maintenance safe harbor: The routine maintenance safe harbor permits landlords to currently deduct the cost of replacing worn items that could reasonably be expected to last less than 10 years.
When determining the amount to deduct or 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. For in-depth guidance, see Every Landlord's Tax Deduction Guide (Nolo) by Stephen Fishman.