Should I deduct or capitalize the cost to replace a water heater in my rental property? (details Below)
If you're repairing an existing appliance - its an expense. If you're replacing an existing appliance with a new one - that's disposing of one capital asset and putting in service another. You depreciate the new one and you dispose of the old one (if not fully depreciated - talk to your tax adviser how to handle the remaining value). The additional costs of the fixes that are not related to the installation of the new appliance are regular maintenance expenses, so you have to get an itemized invoice from the plumber to know what to expense and what to capitalize. Pub 527 my friend.  It gets depreciated. Table 1-1 on page 5. You may be able to choose.  As a small business, you can expense certain depreciable assets (section 179).  But by choosing to depreciate the asset, you are also increasing the cost-basis of the property.  Are you planning to sell the property in the next couple of years?  Do you need a higher basis? Section 179 - Election to expense certain depreciable business assets
You will need to look at the 27.5 year depreciation table from the IRS. It tells you how you will be able to write off the first year. It depends on which month you had the unit ready to rent. Note that that it might be a different month from when you moved, or when the first tenant moved in. Your list is pretty good. You can also claim some travel expenses or mileage related to the unit. Also keep track of any other expenses such as switching the water bill to the new renter, or postage.  If you use Turbo tax, not the least expensive version, it can be a big help to get started and to remember how much to depreciate each year. "Not sure what you are talking about.  The house isn't part of a business so neither of you can deduct half of normal maintenance and repairs.  It is just the cost of having a house.   The only time this would be untrue is if the thing that you are buying for the house is part of a special deduction or rebate for that tax year.  For instance the US has been running rebates and deductions on certain household items that reduce energy - namely insulation, windows, doors, and heating/cooling systems (much more but those are the normal things). And in actuality if your brother is using the entire house as a living quarters you should be charging him some sort of rent.  The rent could be up to the current monthly market price of the home minus 50%.  If it were my family I would probably charge them what I would pay for a 3% loan on the house minus 50%.   Going back to the repairs... Really if these repairs are upgrades and not things caused by using the house and ""breaking"" or ""wearing"" things you should be paying half of this, as anything that contributes to the increased property value should be paid for equally if you both are expecting to take home 50% a piece once you sell it." Remember this when you rent. You may get 1,600 back - however, you have to provide insurance on the house still, 10% of that rent goes into a repair fund for things that break. You don't get compensated for months without a renter. You still pay property tax and income tax. If you have someone manage the house, you have to pay their fee (10%+ usually). Lots of variables when renting (I looked into doing the same thing) "Bad areas are tough to value as a owner-occupied property, because the business model for being a slumlord is to rent apartments in absentia, usually to tenants receiving goverment subsidies such as Section 8 vouchers. The vouchers are based on a prevailing rent, which are often on par with nice suburban apartment complexes due to how that ""prevailing"" rate is calculated. So the value of the house is really an annuity calculation. You figure out the potential rental cash flow and apply whatever your local market premium is. The point is, doing an apples to apples comparison is going to be tough, and justifying the cost of repairs that aren't remediating health and safety issues probably won't be recoverable from a home valuation standpoint. A buyer would probably rip out your central air conditioner and sell it! If I were in your shoes, I'd look at the time horizon that you think you're going to be there and amortize the cost over that period. Assuming your mortgage is small and you're staying for about 5 years, spending $10k costs you about $170 a month. Your reward is a modern A/C and heating system. Compare that cost to the cost of moving and your desires and see if it's worth it to you." The other thing that you may or may not be considering is the fact that when she moves or otherwise ceases to live in that condo, you could then rent the unit out to others at the inflation adjusted rent price for the area. You could continue to build equity in the property for a fraction of the cost, and it would continue to be a tax write-off once your mother is not living there. While you have more maintenance and repairs cost when renters live there (typically, anyway), if inflation continues to carry on at about 4-5%, then you would be potentially renting the unit out at between $2,500 and $2,850 by the 10th year from now. Obviously, there are other considerations to be made as well, but those are some additional factors that don't seem to have been addressed in any of the above comments. Carnegie Mellon University (CMU) and the University of Pittsburgh (Pitt) have different end of term dates but by less than a month.  Both have summer sessions, but most students do not stay over the summer.  You can rent over the summer, but prices fall by a lot.  Thirty to forty thousand students leave over the summer between the two.  Only ten to twenty thousand remain throughout the year and not all of those are in Oakland (the neighborhood in Pittsburgh where the universities are located).  So many of the landlords in Oakland have the same problem.  Your competitors will cut their rates to try to get some rent for the summer months.   This also means that you have to handle eight, nine, and three month leases rather than year long and certainly not multiyear leases.  You're right that you don't have to buy the latest appliances or the best finishes, but you still have to replace broken windows and doors.  Also, the appliances and plumbing need to mostly work.  The furnace needs to produce heat and distribute it.  If there is mold or mildew, you will have to take care of it.  You can't rely on the students doing so.  So you have to thoroughly clean the premises between tenants.   Students may leave over winter break.  If there are problems, the pipes may freeze and burst, etc.  Since they're not there, they won't let you know when things break.   Students drop out during the term and move out.  You probably won't be able to replace them when that happens.  If you have three people in two bedrooms, two of them may be in a romantic relationship.  Romantic relationships among twenty-year olds end frequently.  Your three people drops back to two.  Your recourse in that case is to evict the remaining tenants and sue for breach of contract.  But if you do that, you may not replace the tenants until a new term starts.  Better might be to sue the one who left and accept the lower rent from the other two.  But you likely won't get the entire rent amount for the remainder of the lease.  Suing an impoverished student is not the road to riches.   Pittsburgh is expected to have a 6.1% increase in house prices which almost all of it is going to be pure profit. I don't know specifically about Pittsburgh, but in the national market, housing prices are about where they were in 2004.  Prices were flat to increasing from 2004 to 2007 and then fell sharply from 2007 to 2009, were flat to decreasing from 2009 to 2012, and have increased the last few years.  Price to rent ratios are as high now as in 2003 and higher than they were the twenty years before that.  Maybe prices do increase.  Or maybe we hit a new 20% decrease.  I would not rely on this for profit.  It's great if you get it, but unreliable.   I wouldn't rely on estimates for middle class homes to apply to what are essentially slum apartments.  A 6% average may be a 15% increase in one place and a 3% decrease in another.  The nice homes with the new appliances and the fancy finishes may get the 15% increase.  The rundown houses in a block where students party past 2 AM may get no increase.   Both the city of Pittsburgh and the county of Allegheny charge property taxes.  Schools and libraries charge separate taxes.  The city provides a worksheet that estimates $2860 in taxes on a $125,000 property.  It doesn't sound like you would be eligible for homestead or senior tax relief.  Realtors should be able to tell you the current assessment and taxes on the properties that they are selling you.   You should be able to call a local insurance agent to find out what kinds of insurance are available to landlords.  There is also renter's insurance which is paid by the tenant.  Some landlords require that tenants show proof of insurance before renting.  Not sure how common that is in student housing. To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk. "I would not classify utilities (including electric) as additional fees.  In many cases you interact directly with the utility (not the landlord) and pay for what you use.  There are exceptions like when renting a room. The renter's insurance also is not part of the landlord's profit, it is simply there to protect you.  In the case of loss, the landlord cannot insure your property. You have to provide your own insurance.  Its pretty low costs, typically less than 20 per month. The application fee is typical.   The move in fee is something that could be negotiated away and sounds pretty sketchy.   You can always ""let your fingers do the walking"" and find out the fees before you look at the place." First of all, Dilip's answer explains well how the business deductions generally work. For most (big) expenses you depreciate it. However, in some cases you need to capitalize it, which is another accounting method. When you capitalize your expense, it becomes part of the basis of the product you're creating. Since you're an engineer, this might be relevant for you. Talk to your tax adviser. How exactly you deduct/depreciate/capitalize things, and what expense goes which way depends greatly on the laws and jurisdictions. Even in the US, different states have different laws, and the IRS and State laws don't have to conform (unfortunately). For example, the limitations on Sec. 179 deduction in 2010-2011 were 20 times higher on Federal level than in the State of California. This could have lead to cases where you fully deducted your expense on your Federal tax return, but need to continue and depreciate it on your State return (or vice versa). Good tax adviser is crucial to avoid or manage these cases. Either way, (lease or buy), it's likely going to be an expense, not a depreciation. You would expense the entire lease amount - whatever that is in the year it was paid. A $2k-$3k computer probably isn't worth the trouble of recording it as a Fixed Asset and depreciating it yearly. I work for a company that buys thousands of PCs a year for its employees and we have a hard rule: If it's under $3k, it's an expense not an asset. If you were buying $20k-$50k servers, this would be a different conversation both because of the price and the life of the item. Because it's such a small amount (unless you really are buying $20k PCs), it doesn't really matter whether it's your biggest expense or not, it's likely just an expense. Though, no one is preventing you from depreciating it over 5 years if you wanted to. See: https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-asked-tax-questions-answers/sale-or-trade-of-business-depreciation-rentals/depreciation-recapture/depreciation-recapture In summary: I would say your question is more of a business sense question than a tax question. Is it worth it to you to lease instead of buying because you are getting a new PC so often? Btw: every 2 years is not that often. It's average. Whatever your decision, I think the answer for taxes is the same: Expense it all in the year it was incurred unless you really want to spread it out and depreciate. Sticking strictly to the money aspects. I am also assuming United States. The lender will need to know before applying for the loan that the property will be a rental, they may even need to know the scope of the number of renters. Insurance. There are two types you will need to include Income taxes.  If you do run a profit you will have taxes. The surprising thing for many first time landlords is that they don't realize that the principal of the loan payment is not considered a deductible expense. Of course there is a benefit to depreciation. Both of these terms do refer to your profit; they're just different ways of evaluating it. First, your definition of capitalization rate is flipped.  As explained here, it should be: On the other hand, as explained here: So cap rate is like a reverse unit cost approach to comparing two investments.  If house A costs $1M and you'll make $50K (profit) from it yearly, and house B costs $1.33M and you'll make $65K (profit) from it yearly, then you can compute cap rates to see that A is a more efficient investment from the point of view of income vs. amount-of-money-you-have-stuck-in-this-investment-and-unavailable-for-use-elsewhere. Profit margin, on the other hand, cares more about your ongoing expenses than about your total investment.  If it costs less to maintain property B than it does to maintain property A, then you could have something like: So B is a more efficient investment from the point of view of the fraction of your revenue you actually get to keep each year. Certainly you could think of the property's value as an opportunity cost and factor that into the net profit margin equation to get a more robust estimate of exactly how efficient your investment is.  You can keep piling more factors into the equation until you've accounted for every possible facet of your investment.  This is what accountants and economists spend their days doing. :-) Think carefully about the added expenses.  It may still make sense, but it probably won't be as cheap as you are thinking.  In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically.  Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer.  When tenants change, there is usually some cleaning and painting that needs to be done. You can deduct the mortgage interest and property taxes on your part of the building.  You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense.  You can also deduct building maintenance and repairs on the rental portion of the building.  Some improvements need to be depreciated over time (5-27 years).  You also need to depreciate the cost of the rental portion of the building.  This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell. If you do this, I would get a professional to do your taxes at least the first year.  Its not hard once you see it done, but there are a lot of details and complications that you want to get right. You can't compare the different quotes unless they have the same numbers to work with. The big companies should use similar models to come up with values for the contents. In many cases they will assume some standard values for things like appliances. Yes you have a stove, but unless it is commercial grade they won't care when giving you a quote. If you have very expensive items you may need a rider to cover them. There is not relationship between the county assessment and the cost to rebuild. The insurance doesn't cover the land. You have to make sure that all quotes include the same riders: cost to put you in a motel, flood insurance... and the same deductibles. Your state may have an insurance office that can help answer your question.  Here is the one for Virginia. The only card I've seen offer this on credit card purchases is Discover.  I think they have a special deal with the stores so that the cash-over amount is not included in the percentage-fee the merchant pays.  (The cash part shows up broken-out from the purchase amount on the statement--if this was purely something the store did on its own without some collaboration with Discover that would not happen). The first few times I've seen the offer, I assumed it would be treated like a cash-advance (high APR, immediate interest with no grace period, etc.), but it is not.  It is treated like a purchase. You have no interest charge if you pay in full during the grace period, and no transaction fee.  Now I very rarely go to the ATM. What is in it for Discover?  They have a higher balance to charge you interest on if you ever fail to pay in full before the grace period.  And Discover doesn't have any debit/pin option that I know of, so no concern of cannibalizing their other business.  And happier customers. What is in it for the grocer?  Happier customers, and they need to have the armored car come around less often and spend less time counting drawers internally.