Repair vs Improvement question/clarification.

[LJ1188]

I inherited a 2 unit rental property, my parents had service contracts for annual boiler maintenance, I continued to use the same service provider.

I want to know if the service contracts and fee's count as cleaning/maintenance?

Unit 2 needed a repair outside of the service contract, should that expense be listed as a repair?

Unit 1's boiler during it's cleaning/maintenance sprung a leak in the heat exchanger due to age, they had to turn off the boiler for a week in November until it could be replaced. Would the boiler replacement be counted as a repair or an improvement? As I didn't choose to replace it, I was required to replace it to restore heat to the unit.

[KrisD15]

The contract is an expense and may be listed as cleaning maintenance.  

However you choose to list it, be consistent year over year. 

If a unit needed a repair to retore it's useful life, that would also be an expense. 

The replacement of the Boiler would be an improvement. Please list that as a separate depreciable asset with a useful life of 27.5 is this is a residential rental. 

[LJ1188]

It looks like I am still able to claim it as a section 179 single year deduction as I believe I was showing a profit for the year still.

[DianeW777 · Accepted solution]

No, this is a capital improvement and is not eligible for Section 179 unless you selected the wrong type of property.  You should be selecting Residential Rental property as indicated so that the depreciation is a 27.5 year recovery.

Exception:  DeMinimis Safe Harbor:

 Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide you are eligible and want to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2023? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision.  Must continue to improvements for the boiler replacement...
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. TurboTax will show on a screen message these expenses should be listed under 'Other Expenses'.
9. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
10. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished.  @LJ1188 

[Carl]

Here's a very basic guide to the difference between a property improvement, repair and other things.

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.

[LJ1188]

Thanks that helped me figure it out.

I didn't understand that a boiler would be classified as an industrial fixture I think it was called, which is considered residential rental property not an appliance.