If you improve or make additions to a rental property, you must
treat the improvement or addition as a separate depreciable
property.  The improvement or addition must be depreciated over
their useful lives and cannot be deducted in the year paid.  With
non-rental, or "residence" homes any improvement gets added to
the basis of the home.  This helps reduce the gain, if any, when you
sell your home.

Improvement Definition
An improvement adds to the value of your property, prolongs its
useful life, or adapts it to new uses.  Improvements include:

Additions

Bedroom Bathroom Deck Garage Porch Patio

 Lawn and Grounds

Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming Pool Miscellanous Storm Windows, doors New roof Central Vacuum Wiring upgrades Satellite dish Security System Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Pluming Septic system Water heater Soft water system Filtration system Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting Insulation Attic Walls, floor Pipes, duct work

If you make an improvement to property, the cost of the improvement
must be capitalized.  The capitalized cost can generally be
depreciated as if the improvement were separate property.

Difference Between Improvement and a Repair
Be sure you understand the difference between a repair and an
improvement.  A repair keeps your property in good operating
condition.  A repair does not materially add to the value of your
property or substantially prolong its life.  Examples of repairs include
fixing a leak, replacing broken windows, painting, fixing the gutters,
etc...  You deduct the cost of  the repair as a rental expense.  It does
not add value to the property.

Example:  Matt Moore repairs a small section of one corner of the
roof of his rental property.  He may deduct the cost of the repair as a
rental expense.  However, if Matt were to completely replace the roof,
the new roof is an improvement because it increases the value and
lengthens the life of the property.  Matt may depreciate the cost of the
new roof. 

Be sure to separate the costs of repairs and improvements, and keep
accurate records.  You will need to know the cost of improvements
when you sell or depreciate your property.

Capitalize the Cost of the Improvement
If you make an improvement to the property, the cost of the
improvement must be capitalized.  The capitalized cost is treated
as if the improvement were separate property.  The improvement's
property class and recovery period is determined the same way
as the depreciation deduction would be determined if the property
had been placed into service at the same time as the addition or
deduction.

Example:  You own a rental home that you have been renting
since 1997.  If you put an addition on the home and place the
addition in service this year, you would use MACRS to figure your
depreciation deduction for the addition.  Under the General
Depreciation System (GDS), the property class fro the addition is
residential rental property and its recovery period is 27.5 years
because the home to which you made the addition is made would
be residential rental property if you had placed it in service this
year. 

Improvement to Rental Property
You can depreciate permanent improvements you make to business
property you rent from someone else.


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