Taxes: Repairs vs Improvements

Property Management

With tax time quickly approaching, it’s important to understand certain aspects of deductions when it comes to your rental property.  Did you know that there’s a major difference in repairs vs improvements when it comes to taxes and the IRS. The IRS considers repairs a deduction, and improvements get capitalized and could be added on to the basis and deducted over time.   

What is a Capital Improvement? 

A capital improvement is an update to the property that will extend the “useful life” of the home.  In other words, something that will add value to the property for years to come. A few examples of this would be: 

  • Adding a deck 
  • Adding a bedroom 
  • Replacing all the existing electric 
  • Bathroom remodel 
  • Replacing all of the windows

What is a Repair? 

A repair is a necessary maintenance item that is needed to keep the property habitable.  The IRS defines a repair as “does not add significant value to the property or extend its life.”  Some examples of repairs would be:

  • Repainting a room 
  • Repairing a roof 
  • Replacing a window 
  • Repairing or updating old appliances 
  • Refinishing hardwood flooring 

How is a Capital Improvement Deducted on Your Taxes?

An improvement is added on to the initial value of the property, and then depreciated over time.  Let’s say you did a $10,000 bathroom remodel on your property. You’ll need to deduct it over a depreciation schedule, and we’ll use 10 years for our example.  You would claim an expense of $1,000 each year for the next 10 years. If you have a 28% tax rate, you would save $280/year in taxes ($1000 x 28%).

How is a Repair Deducted on Your Taxes?
A repair is bringing an item back up to its previous condition, so you can deduct the entire cost of the repair the year it was completed.  Let’s say you spent $5,000 updating old appliances. You would deduct that entire repair expense that same year. Assuming a 28% tax rate, you would save $1,400 in taxes that year ($5,000 x 28%).  

So which is better – a repair or improvement? 

Essentially, a repair is the quick, easy deduction that can happen in the same year it was made and paid for.  An improvement is added to the base value of the property, and is deducted according to the depreciation schedule.  They both equal out over time, but many landlords