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SKjames
Level 2

Is "adding real value" actually a criterion for something to be considered a capital improvement for rental property?

Content deleted. I moved this question to the Investors and Landlords Tax Forum: https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/is-adding-[product ke...

3 Replies
tagteam
Level 15

Is "adding real value" actually a criterion for something to be considered a capital improvement for rental property?


@SKjames wrote:

.....Is this wording about "adding real value" actually listed anywhere official or is it just an unofficial litmus test used by many rental property owners?


No, that wording is not listed anywhere; it was simply coined by another member of this Community and is unofficial (as opposed to the following):

 

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.

 

https://www.irs.gov/publications/p527#en_US_2020_publink1000219015

 

There is no requirement that an expense "add real value" to the property in order to be considered an "improvement". Although many (if not most) improvements do result in an increase in the value of the property to which they attach, there is no requirement that they do so.

Carl
Level 15

Is "adding real value" actually a criterion for something to be considered a capital improvement for rental property?

Actually, it's "add or maintain value" in a property.

Sometimes it can be difficult to differentiate between a repair and a property improvement. For example, if the fan motor in the outside A/C compressor burns out and you pay to have that fan motor replaced, that's a repair because The expense was incurred to return the compressor to the same usable condition it was in, prior to the event that caused the central A/C to be unusable.

However, if you instead elected to replace the outside compressor unit with a complete new unit, that's a property improvement. There's no doubt that a "new" unit will fetch a higher price for the property, than you might get with a 10 year old unit still there; even if that 10 year old unit had a brand new fan motor in it, the unit is still 10 years old.

tagteam
Level 15

Is "adding real value" actually a criterion for something to be considered a capital improvement for rental property?


@Carl wrote:

.....There's no doubt that a "new" unit will fetch a higher price for the property, than you might get with a 10 year old unit still there....


That is absolutely not a settled issued @Carl and is in doubt.

 

Prospective purchasers expect to get a central A/C unit (if most properties in the area have one). A brand new unit may result in a faster sale but, typically, will not command a higher price for the property. 

 

I have been through this literally dozens of times with certified property appraisers and they never fail to appraise comparable (and at times almost identical) properties with new (or newer) mechanicals at roughly the same price as properties with older units. The new units may add some value but it is negligible (and the increase in value is nowhere near the cost of the new unit).

 

Regardless, "added value" is not a litmus test for qualification as an "improvement". 

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