As a landlord, you will inevitably need to make repairs and improvements to your rental property. These are necessary both to keep existing tenants happy and to attract future tenants as well. This can be quite expensive though, especially for more in-depth projects. Thankfully, many repairs and improvements can be deducted on your taxes, which can help less the impact on your bottom line.

One thing that’s important to remember though is that, when it comes to your taxes, there is a major difference between a “repair” and an “improvement.” It might sound like a matter of semantics, but there are specific rules regarding the terms: repairs can be deducted in full on the current year’s taxes, while you will have to deduct the expenses for an improvement over a longer period of time. As such, it is important to know the difference between the two terms in order to make adequate preparations.

What Is A Repair?

The IRS defines repairs (or routine maintenance) as the “amounts paid for recurring activities that you expect to perform as a result of your use of the property in your trade or business,” which are done to “keep the property in its ordinarily efficient operating condition.”¹ As such, something can be considered a repair if it is designed to keep a property at the same condition and level of quality that it was when it was placed in service. Additional requirements are that the repairs in question are something you expect to do more than once during a 10-year period (starting when placed in service) or (for property other than buildings) more than once during the class life of the unit of property.² Repairs are typically one-off fixes rather than extensive projects, and while price is irrelevant, they tend to cost less than $500.³

What Is An Improvement?

In contrast to repairs, which are projects designed to keep a property at the same condition it usually is, improvements are tasks that are meant to raise the value of your property. Under tax law, there are three main types of improvements:

• Betterment: To increase the property’s value, productivity, efficiency, strength, or quality. This includes fixing material defects and making extensions or additions.

• Restoration: To return the property to its ordinary condition after the property has fallen into a state of disrepair or after the completion of its class life.

• Adaptation to a New of Different Use: To convert the property into something different, particularly if the adaptation is not consistent with the ordinary use of the unit of property when originally placed in service.

If an act falls under one of these three categories, then they would be considered improvements.⁴ The reason that improvements cannot be deducted for a single year is because they will add value to your property over an extended period of time, with structural improvements being depreciable on a standard 39-year schedule, while non-structural improvements depreciate over a 15-year accelerated schedule.⁵

What Are Some Examples of Repairs and Improvements?

When determining whether something is a repair or an improvement, consider the scope of the change you are looking to make. Regular maintenance of existing elements are generally going to be repairs: fixing a broken air conditioning unit, replacing a damaged security camera, patching a leaky roof, swapping out some cracked floor tiles would be considered repairs. On the flipside, installing a new security systems or central air conditioning unit, laying down new wall-to-wall flooring, or replacing the roof entirely would be considered improvements. ⁶

Granted, it is important to remember that there are going to be situations where the line between repair and improvement is blurred. For instance, if you need to replace the bricks on the external walls of your property, is that a repair or an improvement? According to some experts, it depends on how you approach it: refinishing the bricks by tuckpointing and replacing a few bad ones would be considered a repair expense, while completely replacing them with a new brick wall would be an improvement.⁷ Paint is also a bit tricky: it is typically considered a repair, but could also be seen as an improvement if it is part of a larger restoration project.⁸ It mostly comes down to context and the overall size of the job.

Are Improvements Worth It?

Given that landlords are required to capitalize and depreciate any improvements they make, some might wonder if it’s even worth making them in the first place. While there might be times when it isn’t convenient to put money into expensive and labor-intensive improvements, they offer a lot for property owners and their tenants. The whole reason for the laws surrounding capital improvements is that these are changes that will add long-term value to your property. So long as the improvements you are making are within your means and something that your target audience would be interested in, they are absolutely worth the time and money investment.

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Endnotes

1.  Internal Revenue Service. (n.d.). Tangible Property Final Regulations: Internal Revenue Service. Tangible Property Final Regulations. https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations.

2.  Internal Revenue Service.

3.  Hall, L. (2017, July 11). The differences between repairs and improvements. Cozy. https://cozy.co/blog/the-differences-between-repairs-and-improvements/.

4.  Internal Revenue Service.

5.  Pirulis, A. (2020, August 4). Repairs vs. Improvements to Your Rental Property. Apartments.com. https://www.apartments.com/rental-manager/resources/article/repairs-vs.-improvements-to-your-rental-property.

6.  Pirulis, A.

7.  Hall, L.

8.  Pirulis, A.