Renewal Tenancy Agreement: Tax Deductible or Not?
As a landlord, it`s important to understand what expenses are tax deductible when it comes to your rental properties. One common expense is the renewal tenancy agreement. But is it actually tax deductible?
The answer is yes, but with a few caveats.
First, let`s define what a renewal tenancy agreement is. It`s simply a new contract between a landlord and tenant that extends the existing lease. This can be done for a variety of reasons, such as if the tenant wants to stay longer or if the landlord wants to change the terms of the lease.
Now, let`s talk about why a renewal tenancy agreement is tax deductible. The IRS considers it a “necessary and ordinary” expense for the maintenance and upkeep of your rental property. This means you can deduct the cost of preparing the agreement, whether you do it yourself or hire a lawyer.
However, there are some limitations to what you can deduct. First, you can only deduct the portion of the cost that relates to the current tax year. If you renew the lease for two years, for example, you can only deduct the portion of the preparation fee that relates to the first year.
Second, you cannot deduct the full cost of the renewal tenancy agreement if it includes any capital improvements to the property. Capital improvements are those that increase the value of the property or extend its useful life, such as adding a new roof or renovating the kitchen. These types of expenses must be depreciated over a period of several years, rather than deducted in the current year.
Finally, it`s important to keep accurate records of all expenses related to your rental property, including the renewal tenancy agreement. This will make it easier to calculate your deductible expenses when tax time rolls around.
In summary, a renewal tenancy agreement is tax deductible as a necessary and ordinary expense for your rental property. However, there are some limitations to what you can deduct, including the portion of the cost that relates to the current tax year and any capital improvements included in the agreement. As always, consult with a tax professional to ensure you`re taking advantage of all available deductions.
