Rental repair vs improvement?

[ciaoskip]

Difference between rental repairs and improvements?

[Anonymous_ · Accepted solution]

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

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

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. Table 1-1 shows examples of many improvements.

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 isn’t consistent with the intended ordinary use of your property when you began renting the property.

De minimis safe harbor for tangible property.

If you elect this de minimis safe harbor for your rental activity for the tax year, you aren’t required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these amounts as rental expenses on line 19 of Schedule E. For more information on electing and using the de minimis safe harbor for tangible property, see chapter 1 of Pub. 535.

Safe harbor for routine maintenance.

If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Pub. 535 for more information.

Table 1-1. Examples of Improvements

Additions Bedroom Bathroom Deck Garage Porch Patio Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool

Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system

Plumbing Septic system Water heater Soft water system Filtration system Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting Insulation Attic Walls, floor Pipes, duct work

[Anonymous_ · Accepted solution]

See also https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Wh...

[Carl]

Here's the definitions as interpreted by me so we "normal folks" can make some kind of sense of it.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement. (Capital 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.

[Anonymous_]

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@Carl wrote:

Here's the definitions as interpreted by me so we "normal folks" can make some kind of sense of it.

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Except you managed to add at least one element that is not required: a higher appraisal.

For example, an in-ground swimming pool would definitely be considered an "improvement" but might not add any value if installed at a house in Fairbanks, Alaska (it might actually result in a lower appraised value). Obviously, there are a plethora of similar examples.

[Carl]

Seems like there's always someone looking for fault. If one were to cover every single itty-bitty possibility, they'd just be re-writing the IRC practically word-for-word. Let's keep it simple for what applies to the vast majority. If the simple doesn't apply to a specific situation, I'm sure they'll converse further about it.

[Anonymous_]

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@Carl wrote:

Seems like there's always someone looking for fault.

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As a result of someone setting forth as a statement of fact which, in reality, is merely an opinion which may or may not be accurate. Simplification is fine, but not at the expense of accuracy. 

Foundation repair, for example, would not be considered an improvement in most instances (although replacement would be so considered).

Also, care needs to be taken with respect to the classification of "betterment" and "restoration" since almost all repairs can be considered "restorative" and result in the property being "better" than before the repair.