In the upkeep of investment property there will be many times where a contractor service such as plumbing or electrical will be needed to provide an installation for major equipment or repair. The first meeting to discuss the issue and get pricing will typically involve a second visit to complete the job. You may not be present for the actual completion of the project and final billing may get delayed. Take great care in tracking the invoice for the service or it may get lost in the process.
I had a recent hot water heater replacement invoice escape my attention and had to scramble to retrieve it before filing for taxes some months later. I met with the contractor and it was agreed that the hot water heater should be replaced. A few weeks later the work was performed and the contractor asked if we could meet to settle the bill. I had used the contractor a few times so had no issue with this arrangement and met him in a mutually convenient strip mall with his check for the work. He was on his way to another job and pressed for time. I asked for the invoice and he replied that he had left it on the new water tank. Trusting him, I gave him the check and made plans to visit the property a few days later to check out the new water tank.
When I arrived at the property the new tank was in place and functioning, but there was no invoice. I had to remove the old heater and store it under a porch as it was mid winter and there was no way to easily remove it in the snow. When I returned home I called the contractor but had to leave a message regarding the missing invoice. I called a week later after receiving no response and left another message. Eventually he called back and assured me he had left the invoice on the water heater. I knew I would be removing the old heater in a few weeks, so I decided I would look again at that time.
The matter was finally resolved; I found the invoice with the old water heater just in time to file taxes for the year. If I had not resolved the issue I could not deduct it as a capital improvement expense, which would impact deductions for years to come. Add a few such episodes over the years and the capital improvement total for the property would not nearly reflect the true total expense for repairs and improvement on the property. The real impact of not keeping track of invoices and not deducting these expenses comes when its time to sell the property. The capital gains tax deducts the total capital improvements from the net sales, (among other calculations) to come up with the taxable income from the sale. The more you have spent and can account for at the time of closing, the less you will be taxed and the more money you will keep. The above invoice transaction was a very rare miss-step for me, but don’t let these missing invoices go unresolved. The consequence of doing so could mean the loss of thousands of dollars in the future sale of the property and tax deductions over the years!