Understanding Repairs in a Rental Property: The BRA Method

Understanding Repairs in a Rental Property: The BRA Method



what is the bra test for real estate investors well get your mind out of the gutter number one number two it's gonna save you a lot of money that's today's episode let's dive into it hey everyone I'm Clayton Morris longtime real estate investor and when I turned 40 I was able to achieve financial freedom be able to quit my day job because of buy-and-hold real estate the whole story is here on a channel if you feel like diving into it but we try to teach you how to do the exact same thing so all the tools are right here on this channel there's we don't hide anything and hold anything back you can go through every one of our different videos and shows and actually take action to start creating financial freedom for you and your family it's all here just a matter of how active you want to be are you a dog with a bone and want to take action or are you okay with driving two hours to and from work every day and not spending more time with your family again the choice is totally up to you how you want to change your life or not we give you the tools to do it again we use buy and hold real estate so we hold real estate every month but when we hold it for the rest of our lives but every month it produces monthly cash flow our tenants are paying us every month now sometimes you might even have a mortgage on that property that's great you might have leverage on that property from a bank guess what the tenant is paying the mortgage and the difference you get to pocket that difference every month that's the power of rental real estate but the cash flow is one piece of it the tax benefits are what I'm really in love with so the cash flow is one p is great but the tax shelter the tax benefits of rental real estate are second to none especially if you know how to purchase the property correctly so on today's show I want to talk a little bit about the repairs in a rental property now I'm a whole series of videos home repairs and things here on the channel but I want you to think about why repairs are so important to creating that tax shelter you know a lot of people get scared and are worried about repairs I don't give a rat's behind about repairs we had a fix a roof on a property in our New Jersey property one of rentals we have 10 there we need to put a new roof on it we can either put a repair or just slap a new roof why I said $3,000 let's put a new roof on let's do it you know why because I love repairs I want that I want that deduction I want to be able to depreciate that roof I want that tax benefit of making a repair so when you have people that are freaking out about repairs what if I have to put a new furnace in fifteen years from now who gives a crap give me a furnace to put in I'll pull out you know $1,300 furnace in that property I'll put an $800 water heater in that property give me repairs that improve the property any day of the week and guess what Uncle Sam rewards you for it and that's how you create an even broader tax shelter for your overall business remember our businesses are purchasing these properties and when you have repairs that is a deduction so today I want to talk about the bra test it's a simple little mnemonic that will help you remember whether or not you can deduct these repairs maintenance items in over the long haul meaning you can you can take these deductions many many years in the future and you can break down the cost of putting on that new roof for many many years into the future by depreciating those improvements to the property and we've gone deep into a cost segregation is all about we're not going to do that in this episode but please check out our other tools and tips on how to understand cost segregation cost segregation just means that you can depreciate items in the house separately than the house so the roof can be deducted separately furnace other items can be deducted separately than just the house the structure itself that was a new change in the tax law a few years ago okay the bra test you ready drumroll please for the bra test what is the bra test well it's a simple daemonic that means better restore or adapt better restore or adapt now what does that mean that means that if I'm making a repair on the property is it making the property better meaning improving it from where it was is it restoring it or is it adapting it so better it's kind of an obvious word right it just simply means that I'm improving this property beyond where it was before restoring it to a working condition let's say you bought a historic home I mean I buy a lot of the houses I buyer 70 80 100 years old right so when I'm buying that puppy and I'm doing the fixes on it I'm restoring it to a working condition that's restoring that house so maybe you bought a historic home and there's a whole section of the house that you know has been dilapidated can you restore that rental property to a working condition so better restore and then the third one is more unique its adapt adapt now imagine taking a property that's a let's just because I had a property like this not too long ago and it was like a six bedroom there was a really weird property and decided to basically turn it into like a long-term care facility it's kind of what we did with it still in the process and it's gonna be it's it's a wacky one right it's it's certainly outside the norm but it was kind of you know it's kind of a fun project to look at and it had like 10 acres of land around it because again a bizarre property and not in my normal wheelhouse now it was six bedrooms and I could turn into a six bedroom house but it really wasn't the neighborhood for that what if we turned it into like a long-term care facility we need to go through regulations with the state and all that it's not a whole bunch of Hoops and hurdles but now I'm adding an additional kitchen a management community area and things like that so you know you take those additional steps I'm adapting the a I'm adapting that property to a new use case so again better restore or adapt when you're looking at the repairs that you're doing on a property the IRS is very specific about it I'm gonna read to you from the IRS code I hope you don't go to sleep okay you ready pay attention to this this is the IRS code publication 535 and the IRS clarifies this distinction between maintenance and repair maintenance and repairs this is very important maintenance you have to deduct in the tax year that you do those repairs what does that fix in a toilet okay you're not making the house any better than it was you're not restoring the house really any more than you are I like to think of it as like changing the oil in a car okay you're just changing the oil the cars on the continue running you're just changing the oil that's maintenance that's something you can you must deduct in this tax year if you don't deduct it guess what bye-bye-bye-bye you don't get to do that to deduct it in the next year you've got it inducted in the year and what your filing your taxes in the year that you did that maintenance okay very important now a repair is again falls into the bra test so are you making the place better are you restoring it or are you adapting it now I'm gonna read from the tax code it's very specific follow along try not to fall asleep here it is repairs the cost of repairing or improving property used in your trade or business is either a deductible or a capital expense see the difference routine maintenance that keeps your property in a normal efficient operating condition but that does not materially increase the value or substantially prolong the useful life of the property is deductible in the year that it is incurred right so think about a roof for a second if I'm going to put a new roof on my rental property is that a maintenance or repair meaning if I put a new roof on it is it just kind of you know continuing the life of that property the way that it was without any material benefit or am I now putting like an extra 30 years of life on that property guess what I'm putting like 30 years of life on that property by putting on that new roof okay I'm materially increasing the life long the life efficiency of that property and that is a capital expense that I can depreciate I can depreciate it over many years that's the beauty of repairs okay yes you want to do maintenance you hire a maintenance team through your property management company they go out and have to do little items to fix and keep the house running on time they had to put in air filters and things like that into your property that's just general maintenance that is deductible in the same tax year that you do it okay the bra test remember I think it's a good mnemonic for you to think about when you're looking at your taxes for repairs that's why I love repairs I really do anytime I have to fix something I say yep pay it you know why because then that that comes right off my bottom line and that's less money that I have to pay in taxes I create that tax shelter that that keeps my family growing and burning and churning and creating true wealth so I hope you start to think differently about repairs I really hope you think of differently about repairs in fact I want to leave you with a little quote I was talking to my tax accountant about this very question and from a tax perspective he says Tom wheelwright says repairs are great repairs are great normally fully deductible when you pay for them and there are very detailed regulations explaining repairs and what is and what is not a repair but they are fantastic and the new law has many improvements that can be written off immediately as well as these repairs so again thinking about repairs in a different way don't let it scare you just remember that repairs are a good part of the process it's something you should embrace embrace those repairs when you need to do them ok that's my little nugget today on real estate investing we have so many great resources here I will I really sincerely hope that you subscribe to the channel share this with a loved one that you think needs to take action to become a real estate investor because I truly believe that real estate done and purchased properly like the way that we purchase it and do it at Morris invest can create enormous wealth in your life and can create enormous space and time with your family and that's after all what we're going for ok thanks so much we'll see you back here next time in the meantime go out there take action become a real estate investor it's the number one way to build wealth we'll see you next time everyone

21 thoughts on “Understanding Repairs in a Rental Property: The BRA Method

  1. Better Restore Adapt … maint/repairs count as an expense deduction in the tax years they occurred or can be depreciated … repairs are either deductible or a capital expense which can be depreciated … a new roof is a capital expense vs cleaning carpet which is deductible in the tax year occurred … am I getting this right?

  2. My wife and I own a duplex on south Florida. The tenets are a pain. I don't like repairs. When we moved south we lived in one of the units. We had some problems in our unit….. But not as many as these people.

  3. absolutely! im on my third unit. i put a new roof, new tile floors, water heater, hvac, interiorexterior paint. etc ok which of these is a deduction? my other units, i deduct it all in that year, im confused?

  4. Love your channel clayton. I think I met you and your wife before a while ago. I want to talk to you sometime about investing in buy and hold. Hope you all are well.

  5. I don't follow this at all. I get that for some repairs (new roof), you have to depreciate it over 27.5 years, but I'm still paying for it this year and it affects my cash flow right now. Plus the $109 per year deduction (3,000/27.5) is worth much less in 27 years. In other words $100 in the future, will be worth a lot less than $100 today. What am I missing?

  6. Thank you, this real hit home with me. I currently do most all for the repairs with my property, should I think about hiring out more for the repairs need, note, I do enjoy most of the work need.

  7. Clayton, I understand that you are holding back 40% to cover vacancy, taxes, insurance, repair and management. After paying the fixed costs of taxes, insurance and management how much/how long do you hold the remaining balance before either turning it into another property or taking it as income? Do you have a bank account in your holding company to handle repairs for all properties under that umbrella or hold dollars for each property separately?

  8. If you replace a roof but city requires you to pull a permit on that roof, can you depreciate the total cost of the roof and permit or only deduct the permit same year?

  9. Are there any videos of what you do with your rental income? As we buy, it’d be interesting to see if you make the additional mortgage payment to pay down houses quicker or just move on to buy the next. Thanks

  10. So spend 3k on roof to depreciate it up to 27.5 years to get a total of 1k ish back? Is that how it works? I've got rentals and have no issue making the repairs but in the end I still spend more than I get back on taxes

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