What House Improvements Quality for Tax Deduction
If you improve depreciable property, rental property for example, you must treat the improvement as separate depreciable property.
“Improvement” means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. House improvements to rental properties are depreciated as a separate property
You cannot deduct the cost of house improvements in your rental property but you can recover the cost of improvements by taking depreciation.
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.
House Improvements Definition
House improvements add to the value of your property, prolongs its useful life, or adapts it to new uses. House improvements include:
Lawn and Grounds
- Retaining wall
- Sprinkler system
- Swimming Pool
- Storm Windows, doors
- New roof
- Central Vacuum
- Wiring upgrades
- Satellite dish
- Security System
Heating & Air Conditioning
- Heating system
- Central air conditioning
- Duct work
- Central humidifier
- Filtration system
- Septic system
- Water heater
- Soft water system
- Filtration system
- Built-in appliances
- Kitchen modernization
- Wall-to-wall carpeting
- Walls, floor
- Pipes, duct work
If you make an improvement to property, the cost of the house improvement must be capitalized. The capitalized cost can generally be depreciated as if the improvement were separate property.
Difference Between House 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.
House Improvements Example 1: 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.
House Improvements Example 2: 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.
For more information regarding Depreciation Improvements, visit the IRS tax page.