TurboTax Specialist

Rental Repair or Improvement?

Your rental property needed a facelift. So you replaced the roof, fixed the windows, and replaced some fixtures. How you report those costs can make a big difference in your taxable rental income this year.

 

The IRS defines "improvements" as additions that add to the value of your rental property, prolong its life, or adapt it to a new use. In most cases, you are working on the structure and components of the building.

 

Examples of improvements are:

  • Remodels and room additions (including decks and porches)
  • New or upgraded landscaping, irrigation, sprinkler system
  • Hardscape such as pavement, block or retaining wall, patio
  • Fencing
  • Swimming pool, spa
  • Storm windows, doors
  • New roof
  • Central vacuum or security system
  • Upgraded wiring, plumbing, duct work
  • Central heating, AC, humidifier
  • New furnace, water heater
  • Filtration, soft-water, or septic system
  • Built-in appliances
  • New flooring or wall-to-wall carpeting
  • Upgraded insulation
  • Satellite dish

You'll notice that nearly all these items have a long lifespan and aren't generally replaced very often.

 

So, the $8,000 you spent on that new roof? The IRS won't let you deduct the entire $8,000 from one year's rental income. Instead, the $8,000 is "capitalized" (recorded as a capital asset) and must be depreciated, which means you deduct it over a period of time (the useful life) instead of all at once.

 

The IRS sets the useful life for nearly all assets, based on industry standards. For instance, your rent house itself is depreciated over 27.5 years. And any improvements have the same recovery period (useful life).

 

On the other hand, anything that is not an improvement is a repair. Generally, these costs are to fix an existing feature rather than replacing it. For example, replacing a broken window or a leaky faucet. These costs are rental expenses that are deducted for the year of the expense.

 

Some items fall in a gray area - carpeting, for example. If you install new carpet in the entire rent house, you must capitalize that cost. But if you merely replace carpet in a few rooms, you may deduct that as an expense.

 

The IRS has issued lengthy regulations explaining how to tell the difference between repairs and improvements. These rules have been published here: 

Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property

 

Have you made improvements to your Rental Property? How did you know if they should be depreciated or expensed? Share your story below!

6 Comments
Member II

Rental Repair or Improvement?

I don't understand why the central heat and air in my rental property has to be depreciated over 27.5 years! That is certainly not its "useful life"!

TurboTax Specialist

Rental Repair or Improvement?

I understand your confusion. An HVAC system is often replaced several times during the life of a residence. But the IRS considers the heating and air conditioning to be a component of the original building, not something that was added later or could be easily removed without compromising the function of the home. For that reason, component systems are depreciated over the same lifespan as the building itself.

 

It's also worth noting that if you have to replace the HVAC again in less than 27.5 years, you can write off the remaining cost (original minus total depreciation taken) at that time.

Member II

Rental Repair or Improvement?

So if I add window units, I could deduct them, since they are removable?

Catalyst V

Rental Repair or Improvement?

https://www.irs.gov/pub/irs-pdf/p527.pdf  page 5 specifically lists HVAC as a home improvement.

 

Window Treatments are removable and not permanent structures so yes you can expense them in the year you purchased. Or you can deem them as being drilled into the walls and therefore permanent and capitalize them...  

Visitor II

Rental Repair or Improvement?

In my own case, about five years ago I had to replace an air-handler blower -- a part.  We found the part as a refurbished -- not "new" -- unit.  In that case, we called it a "repair."

 

Here's another example, for which I might casually seek comment.

 

There were no "repairs," "improvements," or "renovations" planned for this year.  I try and plan management of my rental property and my personal finances a year in advance, so I am attempting to do an "estimated" schedule E for 2018.   

 

I was notified that the sub-floor in a corner of the bathroom had deteriorated because of poor caulking around the linoleum.  It needed "repair."  A little less than half the subfloor would be replaced.  

 

This, however, would require complete replacement of the bathroom floor tile.  In the process of repairing the subfloor, the vanity cabinet would be removed and damage to it would be unavoidable.  

 

IRS allows "parts" and materials to be written off if each different item is an expense less than $200 -- entered as "Supplies" in the Schedule E.  So I paid attention to this aspect as the "project" became better defined.

 

Repairing the subfloor, the toilet had to be removed, and it was determined that the toilet -- an item of $225 new -- was damaged.  Because the vanity cabinet would be damaged, we planned to replace it.

 

However, this was not a "complete bathroom renovation," and it was undertaken initially to repair the subfloor.  Subfloor replacement required both vanity cabinet and toilet replacements, both of them damaged at the point of re-installation.

 

I broke down each element of the project, consulting IRS and accountant guidelines.  

 

The subfloor repair was cheap -- about $320.  It was a "repair."  Most of the materials used for the project cost less than $200/item, so those expenses were totaled and entered in the Schedule E "estimate" as "Supplies."  

 

The linoleum or tile replacement for the entire bathroom, according to guidelines, was a "restoration" that would be subject to capitalization.  Oddly, $30 was the expense of the materials, but the overall charge was $660.

 

The broken toilet, by guidelines, was a "repair."  Further, the vanity cabinet, by guidelines, was a "repair," despite the expense of $1,040.  [The accountants always advise that the amount of an expense is not necessarily relevant to the issue of "repair" versus "improvement/restoration."]

 

The contractor advised adding another cabinet base -- more drawers and shelves -- for $285.  This was an "addition" or "improvement.

 

Nothing was done with the bathtub.  Nothing was done to plumbing fixtures, except those involving the vanity cabinet -- a parts expense of $93.  The bathroom wall-tile was left in place, but some of it was re-grouted, and felt that the grout was either a "repair" or a "Routine Maintenance Safe Harbor" item.  To keep things simple, it was deemed "repair."

 

The planned capitalization amounts to a total of ~$950.  Now we get to the issue of the special "election" based in the 2014 regulations -- complicated by a need for an "accounting process" by which capital items are simply expensed, and the problem that you can't easily reverse your depreciation and expensing strategy once the "election" is taken.  Under the election, I would get maybe half the $950 written off as deductible expense.  Otherwise, the two items depreciate over 5 years.  I chose against the safe harbor election.

 

Similarly, for carpet.  Some accountants argue that you should be able to expense and write-off carpet replacement for the entire property.  But even as a rental property, the carpet figures into the marketability of the rental.  So without bothering with "Routine Maintenance Safe Harbor" under a 10-year expectation of replacement, I intend to capitalize the carpet when it needs replacing again.

Visitor II

Rental Repair or Improvement?


@PatriciaV wrote:

I understand your confusion. An HVAC system is often replaced several times during the life of a residence. But the IRS considers the heating and air conditioning to be a component of the original building, not something that was added later or could be easily removed without compromising the function of the home. For that reason, component systems are depreciated over the same lifespan as the building itself.

 

It's also worth noting that if you have to replace the HVAC again in less than 27.5 years, you can write off the remaining cost (original minus total depreciation taken) at that time.


That's probably what stymies people, no exception for me.  It's the simplest solution to the problem for any capital-budgeting item.  The brevity of a depreciation schedule only gets back the investment faster.  A long schedule can always be recaptured according to remaining use-life.  Here, we're looking at recapture.  Maybe people don't "go there" because of the real and imagined arithmetic.

 

It's a one-time investment in time and effort -- but annual updates to an Excel file of your rental property's expenditure history -- written-off and capitalized -- can include the MACRS-related schedules for different types of property.  Another column with annual updates might give "remaining use-life" and "remaining depreciation recapture" or similar.