Repairs and Improvements Frequently Asked Questions

By Jason Watson, CPA
Posted Sunday, May 25, 2025

Here are some FAQs you might find helpful as a chapter summary. There is just one question quiz at the end- Can you deduct a water heater as a repair?

What’s the difference between a repair and an improvement?
Repairs maintain a property’s current condition and can be deducted immediately. Improvements enhance value, extend life, or adapt the use of the property and must be capitalized and depreciated. Sounds simple enough, right?

What is the IRS “BRA” test?
BRA stands for Betterment, Restoration, and Adaptation—criteria used to determine if an expense must be capitalized as an improvement.

What is the IRS “BAR” test?
Trick question.

When must an expense be capitalized?
If it corrects a material defect, replaces a major component, or changes the use of the property, it likely meets BRA standards and must be capitalized. But there are exceptions under the three rental property safe harbors.

What’s the general definition of a capital expenditure?
An amount paid for permanent improvements or acquisitions that has a useful life substantially beyond one year.

What is the de minimis safe harbor?
You can deduct purchases under $2,500 per item or invoice line, even if they are technically improvements, if properly elected on your return.

What is the Safe Harbor for Small Taxpayers?
If the building cost is under $1 million and gross rental income under $10 million, you can deduct repairs that might other be considered improvements up to the lesser of $10,000 or 2% of unadjusted rental property basis (think acquisition costs plus prior improvements).

What’s the Safe Harbor for Routine Maintenance?
You can deduct costs if you reasonably expect to perform the maintenance more than once in 10 years for buildings and systems. This one is tricky, but often overlooked and underutilized.

Can I use multiple safe harbors in one year?
Yes. If you don’t qualify under one, another may still apply.

Do I need to file something to use these safe harbors?
Yes. The de minimis and small taxpayer elections must be formally made on a timely filed return.

Is replacing an HVAC system a repair or improvement?
Usually an improvement unless you can use the small taxpayer safe harbor. You might be able to use routine maintenance as well- for example, you’re replacing 2 out of 10 HVAC units in a multi-unit system. You might also be able to use Section 179 expensing under qualified improvement property.

What about repainting?
Standalone painting is typically a repair. If bundled with a larger remodel, it must be capitalized.

Is replacing windows a repair?
Depends on scale. Replacing all windows is a capital improvement; replacing a fraction, like 100 out of 300, may qualify as routine maintenance. That’s a lot of windows.

Is a water heater a repair or capital item?
If under $2,500, it may qualify under de minimis. Otherwise, it’s likely a capital item unless you meet routine maintenance criteria.

How does routine maintenance apply to water heaters?
If you reasonably expect to replace it more than once in 27.5 years, it might qualify under the routine maintenance safe harbor.

What’s partial asset disposition (PAD)?
When you replace part of a property (e.g., a roof), you can deduct as a loss the undepreciated value of the old component. Not common in non-commercial settings.

Is a cost segregation study required to do PAD?
Not required, but very helpful in estimating the original component’s basis and depreciation.

Can I use bonus depreciation on improvements?
Only if classified as 5-, 7-, or 15-year property—like appliances, landscaping, or qualified improvement property in some cases.

Can I use Section 179 on residential rental property?
Rarely. Section 179 applies only to certain types of asset classes (personal property), and if the rental property is considered non-residential (commercial or short-term rental under 30 days average guest stay).

What is “qualified improvement property” (QIP)?
Interior, non-structural improvements to nonresidential buildings, eligible for bonus depreciation and Section 179.

What are examples of 5-year property?
Appliances, carpeting, kitchen cabinets, and telecom wiring. Yes, we just used the word telecom.

What are examples of 7-year property?
Furniture, decorative lighting, closet shelving, and wall coverings.

What are examples of 15-year property?
Landscaping, sidewalks, fences, patios, and irrigation systems. Throw in pools and hot tubs too.

What is a “unit of property”?
Generally the entire building. But for improvements, IRS rules require looking at each major building system separately for a total of 9. Electrical, plumbing and gas distribution are good examples.

Can I use both Section 179 and bonus depreciation in the same year?
Yes. You can choose how much Section 179 to apply first, and then use bonus depreciation for the remaining basis. Section 179 is applied before bonus by default.

Is Section 179 available for rental property owners?
Only if the rental activity qualifies as a trade or business meaning it’s conducted with continuity, regularity, and profit motive, and the property is either personal property or qualifies as qualified improvement property (QIP, which is specific and limited).

Can I use Section 179 against W-2 income?
Yes, the income limit includes W-2 wages for purposes of the deduction. There are some devils in the details of course.

What happens if I move into a rental after claiming Section 179?
You must recapture the excess deduction (difference between typical depreciation and Section 179) as ordinary income if the property is no longer used predominantly for business purposes.

Is bonus depreciation available on foreign rental property?
No. Both Section 179 and bonus depreciation are not available for property located outside the U.S..

Can Section 179 create a loss on a partnership return?
Generally no. Section 179 cannot create or increase a loss on Form 1065. This is a key limitation for partnerships and multi-member LLCs.

Does bonus depreciation have recapture issues like Section 179?
Not directly. Bonus depreciation doesn’t require recapture upon a change in use, but the asset continues depreciating and recapture may apply at sale.

Should I use Section 179 if I might move into the property later?
Probably not. If future personal use is planned, avoid Section 179