Can I deduct all renovation losses on my rental property against my income or is there a limit?

I've owned a rental property for about 5 years now, and it's finally time to address all the outdated features. Most of the appliances and fixtures are from the early 80s, and I'm planning a complete renovation to make it more appealing to potential renters. The quotes I've received put the renovation costs around $65,000, which is significantly more than my annual rental income (about $38,000/year). I'm wondering what happens tax-wise with this negative balance. If I'm spending $65,000 on renovations but only bringing in $38,000 from rent, can I apply that $27,000 loss against my regular W2 income? Or is there some kind of limit to how much I can deduct? Also, if I can't deduct it all in one year, does the remaining amount roll over to next year's taxes? At what point does investing more money in renovations stop making sense from a tax perspective? I want to make the property nicer but also be smart about the tax implications.

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18 comments

Joy Olmedo

•8M

What you're asking about involves the passive activity loss rules, which definitely apply to rental properties. Most rental property expenses are considered repairs or improvements, and they're treated differently for tax purposes. For repairs (fixing what's broken to keep the property in good working condition), you can deduct the full amount in the year you spend it. But for improvements (like renovating a kitchen or bathroom), those costs need to be capitalized and depreciated over time (usually 27.5 years for residential rental property). Based on what you described as a "full renovation," most of those costs will likely be considered capital improvements rather than immediate deductions. That said, there is a special provision that might help - if your Modified Adjusted Gross Income is under $100,000, you can deduct up to $25,000 in passive losses against your non-passive income (like your W2 wages). This deduction phases out if your MAGI is between $100,000-$150,000. Any losses beyond what you can deduct in the current year do carry forward indefinitely until you either have passive income to offset them or until you sell the property.

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Joy Olmedo

•8M

The IRS has guidelines for distinguishing repairs from improvements. Generally, a repair keeps your property in good working condition without adding value or extending its life - these are fully deductible in the current year. Improvements add value, prolong the property's useful life, or adapt it to new uses - these must be depreciated. Replacing a broken dishwasher with a similar model would usually count as a repair (fully deductible now), but upgrading to a high-end model could be considered an improvement. The $25,000 special allowance applies to individuals who "actively participate" in their rental activities, regardless of property type. Active participation means you make management decisions like approving tenants, setting rental terms, and approving repairs.

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Kiara Greene

•8M

After struggling with similar rental property renovation questions last year, I found this amazing tool called taxr.ai (https://taxr.ai) that completely cleared things up for me. I uploaded pictures of my receipts and renovation plans, and it analyzed everything to show me which expenses were immediate deductions vs. capital improvements. What I really liked is that it explained exactly how the passive activity loss rules applied to my situation and calculated how much I could deduct against my regular income. It even factored in my income level to determine if I qualified for the $25,000 special allowance. Saved me hours of research and probably thousands in deductions I would have missed!

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Kiara Greene

•8M

It absolutely distinguishes between repairs and improvements with specific examples - it even categorized my expenses line by line. For instance, it classified my furnace replacement as a capital improvement but categorized fixing the leaky roof as a repair since it didn't add value, just restored functionality. The tool incorporates both federal and state-specific tax laws. When I entered my property's location, it adjusted the analysis to include California's specific rental property rules, which was crucial since I own property there. It's powered by tax professionals who update it whenever tax laws change, so it's much more reliable than generic advice online.

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Paloma Clark

•8M

Just wanted to follow up about taxr.ai that I mentioned being skeptical about. I actually tried it last weekend with my rental property renovations, and I'm really impressed. It correctly identified that my bathroom renovation was a capital improvement needing depreciation, but the plumbing repairs I did were immediate deductions. It also calculated that since my income was under the threshold, I qualified for the full $25,000 passive loss allowance against my regular income. The coolest part was it created a depreciation schedule for all my improvements showing exactly how much I can deduct each year. Way more detailed than what my previous accountant provided.

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Heather Tyson

•8M

If you're trying to get answers from the IRS about these rental property deduction questions, good luck. I spent 3 weeks trying to get through to someone who could answer my questions about passive loss limitations. After waiting on hold for hours multiple times, I found Claimyr (https://claimyr.com) and tried their service. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me a callback from the IRS within 3 hours! The agent walked me through exactly how to handle my renovation expenses, confirmed which items needed to be depreciated vs. expensed immediately, and explained how the passive loss limitations would apply to my specific situation. Totally worth it for the peace of mind knowing I'm filing correctly.

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Heather Tyson

•8M

They use technology to navigate the IRS phone system and secure your place in line without you having to wait on hold. Once they reach a representative, they call you and connect you directly to the IRS agent. It's that simple - they just handle the waiting part. I was skeptical too, but the difference is that their system knows the optimal times to call and can do the waiting for you. I tried calling myself for weeks with no success, but with their service I was speaking to an actual IRS tax expert that same day who gave me official guidance I could rely on for my rental property renovations.

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Jenna Sloan

•8M

I need to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it anyway because I was desperate to resolve my rental property depreciation questions before filing. Not only did I get a callback from the IRS in about 2 hours, but I spoke with an agent who specialized in investment properties. The agent confirmed I needed to categorize my $45,000 kitchen renovation as a capital improvement with 27.5-year depreciation, but that the $7,000 I spent fixing existing electrical issues could be deducted this year. They also verified I qualify for the $25,000 passive loss allowance since my income is under the threshold. Having that official confirmation gives me so much peace of mind for my tax filing.

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Christian Burns

•8M

Don't forget about the possible option of a cost segregation study for your renovations. This can help accelerate depreciation by breaking down components of your improvements into different categories with shorter depreciation periods (5, 7, or 15 years instead of 27.5). For a $65,000 renovation, it might be worth the cost of the study if you have a lot of components that could qualify for shorter depreciation periods. Things like appliances, carpet, some fixtures, and landscaping often qualify. This can significantly increase your deductions in the early years.

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Christian Burns

•8M

For a renovation of your size, a cost segregation study might cost between $3,000-$5,000 depending on complexity and where you're located. It's generally worth considering when your improvement costs exceed $100,000, but can still be valuable at $65,000 in certain scenarios. The key is what components make up your renovation. If you're doing significant updates to fixtures, appliances, flooring, and HVAC systems (which can be depreciated over 5-7 years) versus primarily structural work (27.5 years), the accelerated deductions could easily exceed the cost of the study within the first 1-2 years. Many accounting firms offer a free analysis to estimate potential benefits before you commit to the full study.

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