Repairs and Improvements are treated differently when dealing with Rental Property

Repairs are deductible while Improvements are depreciated over 27.5 years. If you rent property you can deduct the cost of repairs to your rental property, but you cannot deduct the cost of improvements. The cost of improvements is recovered by taking depreciation.

First, let’s distinguish between and “repair” and an “improvement” A repair essentially keeps the property stable and operating over its probable life. Improvements make the property better in some way. A more thorough definition is as follows:

What is a Repair

A repair, as defined by the IRS, keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Examples of repairs are repainting your property, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

The cost of repairs and maintenance is deductible provided they do not “materially” add to the value of the property or appreciably prolong its life.

If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement.

Repair example: You repair a small section of one corner of the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. You depreciate the cost of the new roof.

What is an Improvement

An improvement adds to the value of the property, prolongs its useful life, or adapts it to new changes. Examples are additions to the structure, adding a swimming pool, installing a water filtration system, and installing insulation.

Only maintenance and incidental costs are deductible against rental income. Improvements that add to the value or prolong life of the property or adapt it to new uses are capital improvements. These capital improvements cannot be deducted currently but need to be depreciated over a recovery period of 27.5 years for residential rental property and 39 years for commercial property.

You must carefully distinguish between repairs and improvements. You must also keep accurate records of these expenses. These records will help you decide whether an expense is a deductible or capital (added to the basis) expense. However, if you make repairs as part of an expensive remodeling or restoration of your home, the entire job is an improvement.

Improvement example: You buy an older home and fix up two rooms as a beauty salon. You patch plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of your property. You cannot deduct any portion if it as a repair expense.

Other Improvement Examples:

  • Additions
  • Bedroom
  • Bathroom
  • Deck
  • Garage
  • Porch
  • Patio

  • Lawn & Grounds
  • Landscaping
  • Driveway
  • Walkway
  • Fence
  • Retaining wall
  • Sprinkler system
  • Swimming pool

  • Miscellaneous
  • 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

  • Plumbing
  • 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 improvements to property before renting it out, add the cost of the improvements to your basis in the property.

Repair vs. Improvements – Rental Property vs. Residential Property

The rules for rental properties are different from residential properties. Any repair made to a residential property is completely non-deductible. In other words, you get nothing! Improvements, on the other hand, get added to the basis of the home and help reduce the gain, if any, when you sell the home.