Once your property is in service, you’ll need to determine whether each repair and maintenance expense you incur should be classified as a regular expense or a capital improvement that must be capitalized and depreciated.
Most rental property owners will prefer to have as many of these costs as possible classified as regular repair and maintenance expenses in order to maximize current year deductions and minimize depreciation recapture.
Before we explore these classifications, we want to make you aware of three “safe harbor” deductions that may prove useful in moving some expenses that would otherwise be classified as capital into the regular expenses bucket:
- Safe Harbor for Small Taxpayers
- Routine Maintenance Safe Harbor
- De Minimis Safe Harbor
We won’t go into all the details of these three safe harbors here, but the IRS official guidance is required reading for rental property owners who want to maximize their current year deductions. You’ll also learn quite a bit about how the IRS approaches capital improvements vs. repairs and maintenance expenses. Of course, you might want to let your CPA handle this for you.
Repairs and Maintenance
Repairs and maintenance are generally one-time expenses incurred to keep your property habitable and in proper working condition. Examples of common repair and maintenance expenses include but are not limited to:
- an existing AC unit
- a faucet or toilet
- a few shingles on a roof
- a cabinet door
- a few planks or tiles on a floor
- a broken pipe
- costs incurred for:
- inspection, or cleaning part of the building structure and/or building system
- replacing broken or worn out parts with comparable parts
A capital improvement is an addition or change that increases a property’s value, increases its useful life, or adapts it (or a component of the property) to new uses. These items fall under categories sometimes called betterments, restorations, and adaptations.
Examples that constitute capital improvements include:
- additions, such as a deck, pool, additional room, etc.
- renovating an entire room (for example, kitchen)
- installing central air conditioning, a new plumbing system, etc.
- replacing 30% or more of a building component (for example, roof, windows, floors, electrical system, HVAC, etc.)
Check out more topics on rental property tax deductions:
- Rental Property Accounting Basics
- 9 Common Landlord Tax Deductions
- Business Travel Expenses for Rental Owners
- Pass-Through Deductions and Casualty Losses
- Rental Property Depreciation Overview
- Passive Activity Limits and Passive Losses
- Capital Gains, Depreciation Recapture, and 1031 Exchange Rules
- Short-Term Rentals and Related Taxes
While reasonable efforts were taken to furnish accurate and up-to-date information, we do not warrant that the information contained in and made available through this guide is 100% accurate, complete, and error-free. We assume no liability or responsibility for any errors or omissions in this guide.