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

[SKjames]

I've seen multiple articles, both on this forum and others that say that capital improvements for rental properties must add real value to the property (or extend the life of the property), such that if the property would be appraised it would appraise higher due to the improvement. One article said that the 2020 Instructions for Schedule E included such wording but I don't see it there: https://www.irs.gov/publications/p527. 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?

(Here are a few examples of articles making this claim:

-https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/deducting-rental-furn...

-https://ttlc.intuit.com/community/rental/help/how-do-i-handle-capital-improvements-and-depreciation-...

-https://cozy.co/blog/the-differences-between-repairs-and-improvements/).

[tagteam]

See Is "adding real value" actually a criterion for so... (intuit.com)

[jayneway]

A capital improvement would be something you can't take with you if you sell or move ex: new roof, kitchen cabinets, water tank, furnace etc. a repair is if you fixed the roof, cabinets , furnace. painting to you may may look and you would think would increase the value. its a repair. fixing faucet so it doesn't drip is a repair etc. capital improvements are usually large ticket items that exceed $ 3000.00.

[Carl]

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.

[Carl]

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]

@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". 

[tagteam]

---

@Carl wrote:

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

---

You have used a hypothetical where a homeowner, of a two bedroom house, converts a garage into a third bedroom and have offered it as an example of an improvement that would increase the value of the home.

Actually, in some neighborhoods that "improvement" would have the effect of decreasing the value of the home. It is certainly an improvement but it is an example of one that could have the effect of neither increasing nor maintaining value.

[tagteam]

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