According to the IRS, a capital improvement is an improvement that adds to the value of property, prolongs its useful life, or adapts it to new uses.
- Is a Capital Improvement Deductible?
- What Is a Maintenance Repair?
- Is a Maintenance Repair Deductible?
- Should I Take a Maintenance Repair Expense Deduction Now or Take Capital Depreciation Deduction over Time?
- How Does the IRS Handle Work That Could Go Either Way?
- Should I Contact a Lawyer Regarding the Work Put into a Property of Mine?
Capital improvements on a property are capital in nature, not generally deductible, and their cost must be recovered through depreciation deductions spread out over the applicable recovery period.
According to the IRS a maintenance repair is a repair that keeps your property in good operating condition. A maintenance repair does not materially add to the value of your property or substantially prolong its life.
The cost of repairs that you make to your rental property is deductible in the year paid.
Should I Take a Maintenance Repair Expense Deduction Now or Take Capital Depreciation Deduction over Time?
In most cases, the taxpayer will pay less tax by classifying expenditure as a repair and taking a current deduction, rather than by capitalizing the expense and recovering the cost by way of depreciation. Over the years, taxpayers have taken an aggressive stance towards classifying most things as repairs, and knowing this, IRS agents have paid close attention to repair and maintenance deductions claimed on people’s tax returns.
The IRS has adopted general guidelines to figure out what happens when work could go either way. They have noted that in determining whether an expenditure is capital chargeable against operating income, one must bear in mind the purpose for which the expenditure was made. The following general checklist is useful in helping the taxpayer in making the determination:
- To repair is to restore to a sound state or to mend
- Capital replacement connotes a substitution
- A repair is expenditure for the purpose of keeping the property in an ordinarily efficient operating condition
- Repairs do not add to the value of the property
- Repairs do not appreciably prolong property life
- Repairs merely keep the property in an operating condition over its probable useful life for the uses for which it was acquired
- Capital replacements, alterations, improvements, or additions which prolong the life of the property, increase its value, or make it adaptable to a different uses
Making the above distinction can sometimes be tough task, even for experienced judges and business attorneys. For this reason, if you own property and are uncertain about how to distinguish work you have had done on a property, it is highly recommended to contract an experienced tax attorney to avoid problems with the tax authorities.