Repairs vs. Improvements – What Can I Deduct from my Taxes?

Written on February 19, 2014 by , updated on September 27, 2017

Repairs vs ImprovementsHaving to make repairs to my rental properties can be expensive.

Knowing that I am able to deduct this expense from my taxes makes it a little easier to swallow.

The general rule is that the cost of “repairs” incurred to maintain your rental properties may be deducted from each property’s taxable income in a given year. However, some repairs are considered “improvements” in which you’re not allowed to deduct the entire expense immediately.

Repairs vs. improvements, so what’s the difference?

Repairs

outlet

This damaged outlet needs repair

Repairs are usually one-off fixes that help keep the property in good working condition and habitable. Although the price is irrelevant, most of my qualifying repairs tend to be under $500 in cost.

Whether you’re fixing a hole in the wall, or a unclogging a shower drain, you can deduct the cost of these minor repairs from the current year’s tax liability.

The IRS clarifies in the 1040 Schedule E Instructions that “repairs in most cases do not add significant value to the property or extend its life.

Improvements

An addition is an "improvement"

An addition is an “improvement”

Anything that increases the value of the property or extends its life is categorized as a “capital expense” and must be capitalized and depreciated over multiple years. Meaning, you can only deduct a small but even portion of these expenses in the current tax year.

Improvements, such as replacing a roof or renovating a kitchen, are usually more labor-intensive than repairs and typically cost substantially more.

The good rule of thumb is that if you are adding a new item, or upgrading an existing item, then it’s usually considered an improvement.

The assumption is that these improvements will add value to the property over multiple years, not just the current year – and thus why you can’t deduct the entire $20k kitchen renovation in a single year.

Likewise, when you sell a property, you’ll need to know the costs of these improvements and how much each one has been depreciated because you will have to pay taxes on the depreciated amount. This should be easy to track if you keep accurate records/receipts and copies of tax returns.

Types of Capital Expenses

The IRS uses the following categories to help define a capital expense. You are required to capitalize and depreciate the following:

  • Improvements. You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.
  • Betterments. Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
  • Restoration. Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
  • Adaptation. Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property.

Comparison of Repairs and Improvements

RepairsImprovements
Repairing a cracked foundationAdding a structural addition, extra rooms, garage, etc.
Repairing a broken AC fan, replacing damaged/clogged air vent registers or air filtersAdding central air conditioning
Replacing a broken security cameraInstalling a security system
Replacing a small area of carpet that was damaged, or having it professionally cleanedInstalling brand new carpet
Patching a leaky or damaged roofReplacing an entire roof
Replacing a broken plumbing pipe, leaky faucet, or running toiletReplacing all existing plumbing
Replacing an unsafe or improperly run section of electric wire, outlet, or light fixtureReplacing all existing electric wiring
Replacing a broken cabinetRenovating a kitchen
Refinishing or resurfacing the wood floors, or replacing damaged planksReplacing the wood floors
Genenal paintingPainting as part of a larger restoration project or addition
Fixing appliancesReplacing appliances (fridge, stove, washer/dryer)
Replacing a broken door knob Replacing all the door hardware in the house for cosmetic reasons
Replacing a few cracked tilesTiling the entire bathroom floor
Replacing the glass in a window frameReplacing multiple windows (entire house)

Finally, Official Guidance

As of January 1, 2014, the IRS has released official guidance regarding deduction and capitalization of expenditures related to tangible property, which add to and clarify the existing understanding of deductible repairs and depreciable improvements mentioned above.

Examples of Improvements

According to the IRS, the addition or upgrade of the following items must definitively be capitalized and depreciated over multiple years.

Additional Resources

Want to learn more? Check out these articles and forms.

photo credit: Alan Cleaver, Karl Palutke via cc
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125 CommentsLeave a Comment

  • Ryan Smith

    Lucas,

    We had a rental property (condo) that was flooded Dec 2015 by an HVAC tech working in the unit above. Our renter was displaced, and did not return. They did repairs to the unit on the front half (walls, carpets, electrical, drywall, and paint). Since they were repairing half and the unit was over 20 years old we opted to have them replace all carpet, paint throughout for a little extra cost. HVAC company covered the repairs with their insurance (over $30K). We also upgraded the kitchen countertop to granite, and added new appliances in the kitchen to sell the unit (another $10K we spent). Some of this was repair and some was upgrade so how do we determine what was capital expenditure. We sold the unit in May 2016. Thanks!

    • J kaster

      Tenant didn’t notify us of a leak in roof and required extensive remodel in order to re rent the house. We opted to improve every thing in the house from paint to new carpet throughout. We are going to sell it. Same scenario as the person with the hvac leak. My question is recapture and capital gains, how to figure and can all cost be written as repairs instead of capital improvements. Also how does capital gains figure into this sale? Thx Jim

  • Anne

    We spent about $10,000 getting our home ready to rent, it included furniture for bedrooms and living room, pots/pans, towels, bikes, things like that, is that deductible as an expense?

    Thank you!

  • Scott Benson

    Hello! I have a four-unit building, and three of the units are rented. Today, I am tuckpointing the building (remove and replace rotting bricks and mortar) on the external walls. $4,500 total. 75% (the rental properties) of that is $3,375. Repair or capital expense? Thanks!

    • Lisa Earnhart CPA

      Hi Scott,
      I would say repair expense. Similar to refinishing or resurfacing a wood floor and replacing some bad planks is an expense, but replacing the floor is capitalized. “Refinishing” the bricks by tuckpointing where necessary an replacing a few bad bricks would be a repair expense, but replacing the brick wall with a new brick wall would be capitalized.

  • Jerome Bennett

    Repairs are definitely a need on anyone’s property. I like how you highlight that they keep the property in good working condition, and that I can deduct it on my taxes. A win-win situation!

  • Zack Alen

    if you have a loss from renting your house can I deduct the loss from my income

  • Wayne kamholz

    Should replacing my front storm door on my house I’m currently living in be sales tax exempt. I bought the door and the store is having it installed I’m paying the store for the door and installation.

  • Brian Wheeler

    I had a ramada (or pergola as it is called elsewhere) on my rental house that reached it’s end of life and needed complete replacement. It was rotted out and could have collapsed at any time. Cost of replacement was about $12,000. Since it what part of the charm of the property and helped me increase the rent, would this be considered a repair or capital improvement?

    Thanks!

  • Brian Wheeler

    My furnace in my rental property died of old age.. no parts could be found! I had to replace it, is this a repair or does it need to be considered a capital improvement?

    Thanks!

  • Brian Wheeler

    The roof on my rental house finally gave up the ghost.. I was fortunate it lasted so long after it’s expected life. I replaced the entire roof, it needed extensive work as water was pooling and not draining, and starting to leak in various locations thru the house. Repair or improvement?

    • Pam Yi, CPA

      This would be capitalized as a major home improvement (27.5 year life for a residential rental property).

      • Sharon

        Most shingle roofs do not last 27.5 years, more like 20 years. I read somewhere that when refinancing remaining points on an existing loan could all be deducted that year. Would that apply to a roof being depreciated for 27.5 years that needs replaced in 20 years?

        • Pam Yi

          Sharon, in this case you would dispose of the old roof, inputting zero as the sales price. A loss on disposal (sales price of zero less the adjusted basis) would come through on your tax return. It would be a capital loss, though, so depending on your capital gains you may be limited on how much you can claim in that year-unused cap losses carry forward, though. Then you would book the new roof as a new asset with a life of 27.5 years.

  • machel cruz

    I have a rental property I spend 3000 on material and 500 labor cost. Is the labor cost part of home improvement?

    Thank you,

    Machel

    • Pam Yi, CPA

      Hi Machel,

      Yes, the labor would be added to the material costs, and the total amount would be capitalized (if a rental).

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