Dear Tax Talk,
Property repairs vs. improvements
I just read your column discussing how to
account for property repair costs. Do you know what qualifies
as a restoration? We just painted the entire exterior of our
rental home and replaced about a third of the rotted clapboards
and some rotted window casings. Is this a repair or a capital
improvement? This subtle distinction plagues us every year at
tax time and IRS Publication 527 isn't much help!
Let's see if I can fix this to improve your understanding.
A repair would be currently deductible
against rental income and an improvement would be subject
to annual depreciation over the useful life of the improvement.
The answer is in Internal
Revenue Service Publication 527, but you have to understand
the subtlety used by the IRS to distinguish between a repair
and an improvement.
You generally can't claim a Section 179
expense (i.e., a direct write-off) on rental property unless
the property is an active business such as a shopping mall.
This makes the distinction between a repair and an improvement
important, because you'd obviously want to maximize your current
According to the IRS, a repair keeps your property
in good operating condition. It does not materially add to
the value of the property or prolong its useful life.
An improvement adds value to your property,
prolongs its useful life or adapts it to a new use.
In your situation, since you've only replaced
damaged clapboards rather than all clapboards, you are keeping
the property in good condition. Obviously, replacing rotten
boards adds to the value of the property. But it does not
materially add to the value; rather, it restores the value.
Similarly, the window casings were rotted
and needed to be replaced to bring the property up to good
order. But if you replaced all the windows, this would be
considered an improvement.
-- Posted: Jan. 13, 2005