Cost basis on home sale: repairs vs improvements, which is it. Remove basement rec room, mold remediation, paint walls and floor install dehumidifier?

[scooterspal]

Also, replace aging but working kitchen appliances?

Refinish oak floors?

Remove wall paper and repaint walls?

[Opus 17 · Accepted solution]

The general principle is that a repair maintains the property in as-is condition or restores it to as-was condition, while an improvement (a betterment) makes the property more valuable or extends the useful life of the building or its sub-systems.  The improvement must be a permanent part of the structure (attached to or part of the house).

Paint and wallpaper is a repair, not an improvement.  I would say the same about refinishing the floors (as opposed to installing a new floor which is an improvement).

Buying new appliances isn't either a repair or improvement unless they are built-ins.

Remodeling is generally an improvement, and if you do things like painting as part of the remodeling, you count them as part of the improvement cost, you don't have to count them separately as a repair.  However, the dehumidifier is not an improvement unless it is permanently attached to or built in to the home.

[scooterspal]

So, if the appliances include a built in counter top range and wall oven what are they? What would a new fridge be considered?

Refinishing five out of the six wood floors in a house to protect them for the future is only a repair?

[Opus 17]

Appliance only add to your cost basis if they become permanently attached to the house.  A moveable appliance is personal property.  A built in range top and wall oven is permanently attached as far as I know, would be pretty dangerous otherwise 🙂   A fridge that has a fancy build-in to match the cabinets is probably also permanently installed, if you can roll it away and take it with you it's not.

Your floor question is tricky.  Looking at the above definition "extends the useful life of the building or its sub-systems", the IRS has agreed that some types of work that "extend the life of a system" are really maintenance or repairs rather than improvements.  This is a benefit if you are a landlord, you can deduct the maintenance in full as an expense instead of having to depreciate it.  Treating floor refinishing as maintenance when you want to expense it, but treating it as an improvement when you want to use it in the basis, seems like trying to have it both ways.

Regular maintenance is an expectation of every homeowner, its just cost of owning a home.  You could also argue that, if full refinishing is needed because of deferred proper maintenance, you shouldn't get an adjustment for that.

One of my colleagues phrased the test as, "would the house appraise higher because of the work in question."  Do you think refinishing the floors would have been enough to raise the appraisal?

Sanding and refinishing wooden floors is somewhere between mopping (maintenance) and full replacement (improvement).  I would argue on the side of maintenance.  It's your tax returns, you are the one who has to justify the treatment if audited.

[CLAVINA]

Hi what would the cost of two ac units of $3600 and $3300 be in schedule to E passive income a repair or maintenance

[DaveF1006]

The two AC units would be reported as depreciable assets and not considered a repair or maintenance. 

@CLAVINA

[Carl]

Here's the definitions. Now these aren't IRS "official" or anything. But they are my interpretation of what the IRS says repairs, maintenance and improvements are, presented in "plain english" so us real people can make sense of them.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

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. An example of a pre-existing condition or defect in this context would be something such as foundation repair (slab jacking) or some other, hidden and costly, anomaly.
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 isn’t consistent with the intended ordinary use of your property when you began renting the property. Adding a wheelchair ramp would be an example.

Expenses for these types of costs are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria need to be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements instead of capitalizing and depreciating them, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and its assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent for the very first time are not deductible.

Repair

Those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent for the very first time are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a 2-bedroom house into a 3-bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.