Accounting for repairs and expenses on a rental property is a topic that creates a lot of confusion. However, the IRS has set forth regulations that are very clear. In this post, I’m sharing a simple mnemonic device you can use to determine whether or not an expense can be written off immediately, or capitalized over time.
The BRA Method refers to Better, Restore and Adapt. Anything that falls under one of these categories counts as a capital expense. These are genuine improvements from when the property was acquired—an improvement that increases the value of the property.
B – Better - This one is the most obvious. If you’re bettering the property, you’re making an improvement. This means adding something to the property that improves the quality and adds value.
R – Restore – This instance refers to purchasing a historic home, and restoring it to working condition. Restoration means you’ve replaced substantial components of a property in order to bring it back to life.
A – Adapt – In my experience, adapting a property is less common, but it does happen from time to time. Adapting a property means making changes that allow the home to serve a new purpose.
If you want to learn more about understanding the US tax code, we highly recommend Tom Wheelwright's book, Tax-Free Wealth.