Repairs vs. Improvements

When you rent out a room in your home or you become a landlord of rental property, you’re entitled to deduct or depreciate your landlord expenses. Among these are the cost of improvements and repairs to the space you rent out.

Whenever you fix or replace something in a rental unit or building you need to decide whether the expense is a repair or improvement for tax purposes. Why is this important? Because you can deduct the cost of a repair in a single year, while you have to depreciate improvements over as many as 27.5 years.

For example, if you classify a $10,000 roof expense as a repair, you get to deduct $10,000 this year. If you classify it as an improvement, you have to depreciate it over 27.5 years and you’ll get only a $350 deduction this year.

That’s a big difference.

Unfortunately, telling the difference between a repair and an improvement can be difficult. In an attempt to clarify matters, the IRS issued lengthy regulations explaining how to tell the difference between repairs and improvements.

The difference between an improvement and a repair is that an improvement makes your property much better than it was before, restores it to operating condition after it has fallen into disrepair, or adapts it to a new use. A repair keeps your rental property in good operating condition but does not materially add to its value, substantially prolong its useful life, or make it more useful.

It’s well settled that replacing an entire carpet in a rental property is an improvement, not a repair. In contrast, mending a hole in a carpet is a currently deductible repair.

Unless one of the exceptions described below applies, you’ll have to depreciate the cost of the carpet over the property’s useful life. If the carpet is tacked down, it is classified as personal property and is depreciated over five years. But if the carpet in a residential rental property is glued down, it is considered to be part of the building structure and must be depreciated over a whopping 27.5 years. Today, most carpets are tacked down and qualify as personal property with a five-year depreciation period.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com