What is the difference between a repair and an improvement?
Mendell Gosnell - Saturday, July 11, 2020
Is It a Repair or An Improvement? Tax Considerations…
As an investor, you want to take advantage of as many tax deductions as possible to increase the return on your investments. Maintenance on your property is a viable tax deduction, however, there is adifference between how you are allowed to use repairs and improvements in your tax returns.
The Internal Revenue Service has defined the difference between repairs and improvements in Pub.527. In general terms:
A repair is what you do to maintain the property. Examples are fixing leaks or faulty electrical, replacing a broken window or lock, cleaning, carpet cleaning, and touch-up painting. During the course of the tax year, you can deduct repairs on your income tax statement.
An improvement adds to the value of your property, prolongs its useful life, or adapts it to new uses. Instead of deducting an improvement during the current tax year, you must capitalize and depreciate it over time. Here are typical examples of improvements.
Complete flooring or roofing replacement
Complete replacement of an air-conditioning and/or heating system
Major remodeling, such as renovation of a bathroom, kitchen, or other major building project
Additions such as a deck, garage, porch, patio, or family room
The size of the expenditure can trigger a closer look by the Internal Revenue Service to determine whether it is a repair or an improvement. This is not a universal rule, but simply common sense, making it even more important to be able to justify the cost of the item in the event you have an audit.
The timing of any maintenance that takes place on a property is also crucial. If you contract any work that takes place before any attempt to rent, consider it an improvement, not a repair. However, the consensus of tax advisers is that if you have the property on the rental market while doing normal repairs, you can deduct them as ordinary maintenance.
The key here is to document that you actively marketed the property while repairs were taking place. Otherwise, all repairs before establishing the property as a rental are improvements to capitalize and depreciate.
A natural disaster also may affect the types of expenses you may claim. The same definitions of a repair or replacement still apply, as well as whether you market or continue to rent the property. If you are fixing the property to sell, the use changes.
Keep thorough records of all repairs and/or improvements. Again, the best course of action is to consult a reliable tax consultant. They can also advise you of how long you need to keep the records for any possible audits.
As your property management company, we want to bring this important issue to your attention, but remember that we are not dispensing tax advice. If you need to determine the fine line between a repair and improvement, we urge you to talk to an expert on tax law and investment property