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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!

4 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...