Services

Capital Improvements vs. Repairs and Maintenance Expenses

Once your property is in service, you’ll need to determine whether each repair and maintenance expense you incur should be classified as a regular expense or a capital improvement that must be capitalized and depreciated.

Most rental property owners will prefer to have as many of these costs as possible classified as regular repair and maintenance expenses in order to maximize current year deductions and minimize depreciation recapture.

Before we explore these classifications, we want to make you aware of three “safe harbor” deductions that may prove useful in moving some expenses that would otherwise be classified as capital into the regular expenses bucket:

Repairs and Maintenance

Repairs and maintenance are generally one-time expenses incurred to keep your property habitable and in proper working condition. Examples of common repair and maintenance expenses include but are not limited to:

painting
fixing:
an existing AC unit
a faucet or toilet
replacing:
a few shingles on a roof
a cabinet door
a few planks or tiles on a floor
a broken pipe
costs incurred for:
inspection, or cleaning part of the building structure and/or building system
replacing broken or worn out parts with comparable parts

Capital Improvements

A capital improvement is an addition or change that increases a property’s value, increases its useful life, or adapts it (or a component of the property) to new uses. These items fall under categories sometimes called betterments, restorations, and adaptations.

Examples that constitute capital improvements include:

additions, such as a deck, pool, additional room, etc.
renovating an entire room (for example, kitchen)
installing central air conditioning, a new plumbing system, etc.
replacing 30% or more of a building component (for example, roof, windows, floors, electrical system, HVAC, etc.)