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 going to
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 to be able to quit
my day job because of buy-and-hold real estate. The whole story is
here on the channel if you feel like diving into it. But we try to teach you how
to do the exact same thing. So all of the tools are
right here on this channel. We don’t hide anything
or 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. It’s 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 OK 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– well, we hold it for
the rest of our lives. But every month, it
produces monthly cash flow. Our tenants are
paying us every month. 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 am really in love with. So the cash flow is
one piece, 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 rental property. Now, we have a whole series of
videos on repairs and things here on the channel. But I want you to
think about why repairs are so important to
creating that tax shelter. A lot of people get scared
or worried about repairs. I don’t give a rat’s
behind about repairs. We had to fix a roof on a
property in our New Jersey property, one of our rentals. We have ten there. We need to put a new roof on it. We can either put a repair
or just slap a new roof on. I said, $3,000? Let’s put a new roof. Let’s do it. You know why? Because I love repairs. 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 15 years from now? Who gives a crap? Give me a furnace to put in. I’ll put a $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, over the long haul. Meaning 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 what
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. OK, the BRA test. You ready? Drum roll please
for the BRA test. What is the BRA test? Well, it’s a simple mnemonic
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” is 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, a lot of
the houses I buy are 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 has been dilapidated. Can you restore
that rental property to a working condition? So “better,” “restore,”
and then the third one is more unique– it’s “adapt.” Adapt. Now, imagine taking a
property that’s, say– I had property like
this not too long ago. And it was like a six bedroom. It was a really weird property. And I decided to
basically turn it into a long-term care facility. That’s kind of what
we did with it. It’s still in process. It’s a wacky one, right? It’s certainly
outside of the norm. But it was kind of a
fun project to look at. And it had like 10
acres of land around it. It was, again, a bizarre
property, and not my normal wheel house. 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
a long-term care facility? And you have to go
through regulations with the state and all that. There’s still a whole
bunch of hoops and hurdles. But now I’m adding an
additional kitchen. I’m adding a community
area and things like that. So 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 going to read to
you from the IRS code. I hope you don’t go to sleep. OK, are you ready? Pay attention to this. This is the IRS code
publication 535. The IRS clarifies this
distinction between maintenance and repairs. Maintenance and repairs–
this is very important. Maintenance– you have
to deduct in the tax year that you do those repairs. What is that? Fixing a toilet. OK? 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. OK? You’re just changing the oil. The car’s going to
continue running. You’re just changing the oil. That’s maintenance. That’s something you must
deduct in this tax year. If you don’t deduct
it, guess what? Bye-bye. Bye-bye, you don’t get to
deduct it in the next year. You’ve got to deduct it in
the year in which you’re filing your taxes,
in the year that you did that maintenance, OK? That’s very important. Now, a repair, again,
falls into the BRA test. So are you making
the place better? Are you’re restoring it? Or are you adapting it? Now, I’m going to
read from a 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 is incurred, right? So think about a
roof for a second. 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
continuing the life of that property the way that
it was without any material benefit? Or am I now putting 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. OK? I’m materially increasing
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. Yes, you want to do maintenance. You hire a maintenance
team through your property management company. They go out and they have to
do little items to fix and keep the house running on time. They have 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. OK? The BRA test. Remember it. 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. Any time I have to fix
something, I say, yep, pay it. You know why? Because then it comes
right off my bottom line. And that’s less money that
I have to pay in taxes. I create that tax shelter
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
it differently about repairs. In fact, I want to leave
you 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 on what
is and what is not 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 them scare you. Just remember that repairs
are a good part of the process and something you
should embrace. Embrace those repairs
when you need to them, OK? That’s my little nugget today
on real estate investing. We have so many
great resources here. 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. Great vídeo man ! Something bad become something good , thanks !

  2. Great video. I'm looking forward to getting out of debt, then beginning my journey with rental properties.

  3. Can the money you use to do said repairs, restorations or adapting be a personal loan or credit card and still be deducted?

  4. 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

  5. Thanks for the good information great channel

  6. 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

  7. Solid Video.

  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. 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?

  10. Is the same with Trump new tax plan?

  11. Really tricky to hear you in that room. It's very echoey.

  12. I’m not scared of repairs anymore!

  13. 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.

  14. 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?

  15. A new roof for $3,000?!? How many squares and what type of roof? That’s very cheap.

  16. I enjoy watching you and your loved one totally stories make me feel very promising blessing

  17. Who else is tired of seeing Ross Hamilton

  18. 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.

  19. 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?

  20. 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.

  21. 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?

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