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Property repairs vs. improvements

Dear Tax Talk,
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!
-- John

Dear John,
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 deductions.

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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