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How are repairs and improvements different?
One sticky area is repairs versus improvements. Repairs are expensed and deducted in the current tax year, whereas improvements are capitalized and depreciated over time. Most rental property owners want to expense as much as they can to gain the immediate tax benefit. In Publication 527 the IRS defines improvements as something that “adds to the value of property, prolongs its useful life, or adapts it to new uses.” Some examples from the publication include wall to wall carpet, new roof, additions, kitchen updates, etc.
There is one caveat that you should be aware of- in the same list of examples, the IRS is quick to point out that work you do or have done to your rental property that does not add much to either the value or the life of the property, but rather keeps the property in good condition is considered a repair and not an improvement. A common example is paint, even if you completely paint the interior and exterior.
HOA dues can also be problematic since some HOAs cover the costs of roofs and other items that are typically depreciated and not expensed. This is especially true for condominiums or cooperatives. Having said that, we usually deduct 100% of all HOA dues unless there is a strong distinction of the funds.
Ok- where do we go from here? New carpet in one room (generally expensed)? New stove (generally depreciated)? Are they repairs or improvements? More discussion is generally required since each situation is unique. We are generally aggressive, and prefer to expense as much as we can for those items that are not readily discernible.