Since the Christmas blizzard, my tenants have been cringing at their natural gas bills. All of my properties have central heat and air with a gas-fired furnace; in Arkansas, this is the cheapest way to heat. Also, many of my homes were built in the 1950s, and have aluminum frame windows. These windows are not energy efficient.
Over the weekend a tenant asked me “In 2009, there was a tax credit. Why didn’t you put in efficient windows?” The answer is pretty simple: landlords weren’t allowed to take the credit. But to be honest, our messed up tax system makes it almost impossible for me to update my houses in a manner that makes financial sense.
The rest of this blog post is to illustrate how stupid our tax system is. Feel free to pop some popcorn and laugh at my frustration.
I’ll use one of my houses as a real example. I have a 3 bedroom, 1.5 bath house in the Broadmoor area of Little Rock. The windows are aluminum frame, single pane. They’re not energy efficient. When the weather gets cold, the windows sweat a little and even though they’re caulked and sealed perfectly, the frame and glass get very cold, and the house's heater has to run longer.
How much money are we talking about? Window World sells vinyl frame replacement windows at roughly $200 each. If I want the argon E-series glass, that’s another $65. There are 10 windows in the house to be replaced, for a total of $2650. But remember, landlords didn’t get the energy tax credit so I have to pay for those windows out of immediate cash flow, after paying the mortgage, taxes and insurance.
“But wait,” you say. “Don’t you get to write that off your taxes?” Well, not the way you think.
If the existing window was broken, I could write it off the entire amount as a repair the same year. But if the existing window is NOT broken, the IRS considers the new window an “improvement” and requires me to depreciate the cost; in other words, I can only deduct a little part of the cost each year for a fixed number of years.
“How many years?” you ask. Well, it depends upon how many years I’ve owned the house, subtracted from 27.5. In this example, in 2009 I had owned the Broadmoor house for 4.5 years. That means that I would have to spread the $2650 out over 23 years. Each year I would only be able to deduct $115.22 a year off my house’s taxable income.
$115.22 is not much at all, especially as prices keep going up. To add insult to injury, my accountant would charge me more to keep up with the paperwork on my tax forms!
While this will sound harsh, it’s a fact that rent for most areas is market driven, not feature driven. Having vinyl windows will not let me raise the rent to cover their cost, and having aluminum windows doesn’t lower the rent. To me, with such a bad tax system in place, I am actually encouraged by the tax code to NOT spend money improving my houses.
With our current tax system, the real loser is the tenant who continues to pay higher utility charges.