The Difference Between Doing Rental Property Repairs And Improvement

When you own or lease some property, things inevitably get broken and wear out with time. The same, improvements may be required, which change the shape and/or appearance of your real estate. Repairs and improvements differ from one another – from the point of view of their nature and taxation. We’re considering rental property repairs vs improvements in more detail below.

What’s the point of drawing a line between repairs and improvements?

One word: taxes. In other words, it matters in such a way:

1. If you’re a natural person-homeowner, you cannot deduct repairs from your annual taxes but you can do so for capital improvements.
2. If you’re a natural person or legal entity landlord, that is, rental property owner or sole proprietor, and you earn income from the property you own, you can deduct both repair and improvement costs from your annual taxation base.

For the US, in particular, you will have to use IRS form 4562 to determine your tax deductions. But before applying, it is advisable to consult with a tax attorney to define specifically, what is deductible for you and how exactly you should fill this form. The thing is that you simply can’t deduct all the expenses in one year. Some do, others simply don’t, requiring 5, 10, 15, 27.5, or 39 years of deduction (as well as the other number of years is possible – that would depend on the particularity in your type of repairs/improvements and your area’s legislation).

Repairs vs improvements: what’s one and what’s another

Let’s pinpoint the definitions.

1. Property repairs are something that does not increase the cost of your property in general (and does not intend to) and that does not presume the improvement or change the configuration and nature of your real estate object. Also, it does not prolong its life span. Basically, this is to repair things that got broken. Anything you would describe with words “repair”, “fixing”, “replacing”, or “patching” is included in the “repairs” notion. Also, you’d apply the “repair” notion to anything that got “broken”, “non-functional”, “cracked”, “leaky”, or “faulty”. You would do repair to support normal living or working conditions of the premises, not making things dramatically better compared to what they were. Example: leaky roof, cracked foundation, clogged filter, a broken hinge of the door, burned bulb, or a cracked tile.
2. Improvement is anything that prolongs the life span of a real estate object, improves it, changes its essential configuration, and leads to an increase in its cost. Anything that you could characterize with “upgrade”, “install”, “remodel”, “refurbish”, would do for “capital improvement”. Example: adding a new room, installing a new HVAC or system of piping/ducts in the entire premises, roof replacement, or kitchen remodeling.

What category does repainting enter? That’s a tricky question. Usually, if only repainting is done and nothing more – it is a repair. If inner/outer (re)painting is a part of an agreed set of capital improvement procedures, then it is an improvement.

Speaking of repairs vs improvements rental property, it should be specifically and exclusively written in the rental agreement, which of the things that got broken are fixed by tenants, and which are surely done by a landlord – this seriously affects the tenant turnover ratio and general satisfaction from renting your property. In such a manner, you can avoid any possible confusion and misinterpretations in the future. Remember that depending on the state requirements (or country requirements if outside the US), a landlord is obliged to do some property repairs at their own cost and within the specific time or the repairs can be done by a tenant with rent deduction. Also, it may be the landlord’s responsibility to make sure to provide the minimum demands to rented space before and during its rent. To find out, what exactly is required from a landlord and what may be passed to tenants, read the current legislation of your area or consult with a specialist.

Taxation principles of repairs vs improvements rental property

There exist specific instructions of IRS as to what to include in improvement (and further capitalization, adding to the cost of the real estate object). These are the installation, improvement, or replacement of:

1. HVAC (including the system itself, ducts, and piping)
2. Plumbing (including the septic system, filtration, and heaters)
3. Pool
4. Various interior improvements & additions: kitchen remodeling, changing the floor, ceiling, and walls, including a wall-to-wall carpeting
5. Exterior improvements & additions: walls, roof, satellite dish, security system, various insulations, or general footage reconfiguring
6. Grounds and lawn: landscaping, fencing, walling, driveway and walkway creation and remodeling, installing a sprinkler system, wiring.

Rental property improvements depreciation is a part of your tax deduction. IRS of the USA requires the improvement costs to be included in depreciation and yearly tax deduction (but, surely, you can forget or be unaware of that and pay more taxes).

Keep taxes in mind when capitalizing the costs and pass them to depreciation. Below, we are submitting some useful points of IRS info:

• Form 1040, Schedule E
• Publication 527 on residential rental property
• Publication 946 on rental property depreciation rules
• IRS guide for Tangible property regulations.