A repair keeps the property in its normal operating condition and is deducted in the year you pay for it. An improvement makes the property better, adapts it to a new use or restores it, and it has to be depreciated over time, usually 27.5 years for residential rental property. Three IRS safe harbors let many landlords deduct more right away.
- Repairs are deducted in the year paid; improvements are depreciated, usually over 27.5 years.
- An expense is an improvement if it betters, adapts or restores the property.
- The de minimis safe harbor lets you deduct items up to $2,500 per invoice or item.
- The de minimis and small taxpayer safe harbors must be elected on a timely filed return.
How Does the IRS Decide If It's an Improvement?
An expense is an improvement if it does any of these:
- Betterment. Fixes a defect that existed when you bought the property, makes it bigger or materially increases its capacity, quality or efficiency.
- Adaptation. Changes the property to a new or different use, like turning a garage into an apartment.
- Restoration. Replaces a major component, rebuilds something to like-new condition after it fell into disrepair, or repairs damage you've already deducted as a casualty loss.
If none of those apply, it's generally a repair.
What Are Common Repair and Improvement Examples?
| Usually a repair | Usually an improvement |
|---|---|
| Patching a section of a leaking roof | Replacing the entire roof |
| Fixing a broken window | Replacing all the windows with upgraded ones |
| Repainting between tenants | Adding a bathroom |
| Servicing the furnace | Installing a new HVAC system |
Which Safe Harbors Let Landlords Deduct More?
1. De Minimis Safe Harbor
You can elect to deduct items costing up to $2,500 per invoice or per item, as long as you'd treat them the same way in your books. A $900 refrigerator can be deducted instead of depreciated over five years.
2. Routine Maintenance Safe Harbor
Recurring work you reasonably expect to do more than once in 10 years to keep a building in normal operating condition, like servicing a boiler or inspecting and repairing systems, can be deducted.
3. Small Taxpayer Safe Harbor
If your average annual gross receipts are $10 million or less and the building's unadjusted basis is $1 million or less, you can deduct all repairs, maintenance and improvements for that building as long as the total for the year is no more than the lesser of $10,000 or 2% of the building's unadjusted basis.
The de minimis and small taxpayer safe harbors are annual elections made by attaching a statement to a timely filed return. If you miss them, you can't add them later on an amended return.
How Much Does the Classification Matter?
A $9,000 expense deducted this year versus spread over 27.5 years is the difference between about $9,000 of deductions now and about $330 a year. Getting the classification right, and making the elections, is one of the easiest ways for a landlord to lower this year's tax bill.
For the bigger picture on deductions and the passive loss rules, see how rental property income is taxed.
Quick Questions
Is a new water heater a repair or an improvement?
Replacing a water heater is often treated as an improvement, because it can restore a major component of the building's plumbing system. If the cost falls under the $2,500 de minimis safe harbor, though, you may be able to deduct it right away.
Is painting deductible?
Routine repainting to keep a rental in good condition is generally a repair. Painting done as part of a larger renovation that's an improvement is usually capitalized with the rest of the project.