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. Of course, you might want to let your CPA handle this for you. 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:.
These items fall under categories sometimes called betterments, restorations, and adaptations. Whether we are talking about commercial airplanes, the fleets on the road, big manufacturing equipment, or that small property in the suburbs you rent out, maintenance and repair is how we keep any physical asset running optimally and able to fulfill its purpose. In essence, repair and maintenance have the same end goal: get the most useful life out of the tools, equipment, and infrastructure we use.
However, the way they go about achieving this goal is very different. The level of repair we need to perform corresponds to the level of failure that is causing asset malfunction.
We can differentiate between two basic types of equipment failures:. Equipment breakdowns can be very expensive. Some are the results of human error, freaky accidents, and natural wear and tear that happens over many years of use. Those factors are impossible to control.
That being said, most breakdowns and subsequently major repairs are preventable — which leads us to proactive maintenance. Maintenance is often used as an umbrella term that covers all maintenance work we perform on our assets. This includes maintenance activities like:. As you can see, performing repairs can technically be categorized under maintenance work. Businesses that rely heavily on physical assets can spend a big chunk of their operational budget on repairs and maintenance.
In an effort to be more proactive and reduce operational costs, maintenance and facility managers are implementing CMMS systems at an increasing rate.
They use them to schedule planned maintenance and automate their maintenance operations. No matter how much time and money we spend on maintenance, sooner or later, assets will stop being cost-effective. When an asset is nearing the end of its lifecycle, there comes a point when buying a new asset makes more sense than trying to keep the old one alive. When working with aging assets, maintenance professionals should consider running a repair vs replace analysis. It is another chance to reduce repair and maintenance costs by thinking long-term.
Businesses and rental property owners can deduct certain expenses for repairs and maintenance of their property and equipment. Even though we have written about property maintenance , legal matters are not our bread and butter. Please reference the Terms of Use and the Supplemental Terms for specific information related to your state.
Grow Your Legal Practice. Meet the Editors. Repairs vs. Understand the IRS rules on improvements including unit of property, betterments versus adaptions, and building systems. That's a big difference. Betterments An expenditure is for a betterment if it: ameliorates a "material condition or defect" in the property that existed before it was acquired or when it was produced—it makes no difference whether or not you were aware of the defect when you acquired the unit of property, or UOP discussed below results in a "material addition" to the property—for example, physically enlarges, expands, or extends it, or results in a "material increase" in the property's capacity, productivity, strength, or quality.
Restorations An expenditure is for a restoration if it: returns a property that has fallen into disrepair to its "ordinarily efficient operating condition" rebuilds the property to a like-new condition after the end of its economic useful life, or replaces a major component or substantial structural part of the property replaces a component of a property for which the owner has taken a loss, or repairs damage to a property for which the owner has taken a basis adjustment for a casualty loss.
Adaptations You must also depreciate amounts you spend to adapt property to a new or different use. A building's structural components include: walls, partitions, floors, and ceilings, and any permanent coverings on them such as paneling or tiling windows and doors all central air conditioning or heating system components plumbing and plumbing fixtures, such as sinks and bathtubs electric wiring and lighting fixtures chimneys stairs, escalators, and elevators sprinkler systems fire escapes other components relating to the operation or maintenance of the building, and roofs.
For example, replacement of a building's roof is an improvement to the building UOP. An improvement to any one of these systems must be depreciated: Heating, ventilation, and air conditioning "HVAC" systems: This includes motors, compressors, boilers, furnace, chillers, pipes, ducts, and radiators. Plumbing systems: This includes pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste.
Electrical systems: This includes wiring, outlets, junction boxes, lighting fixtures and connectors, and site utility equipment used to distribute electricity.
All escalators. All elevators. Fire-protection and alarm systems: These includes sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detectors, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers and hoses.
Security systems: These include window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit. Gas distribution system : This includes pipes and equipment used to distribute gas to and from the property line and between buildings.
Using Safe Harbors to Deduct Repairs and Improvements As the above discussion shows, it can be difficult to determine whether an expense is for a repair or improvement. These are: the safe harbor for small taxpayers routine maintenance safe harbor, and de minimis safe harbor. Safe Harbor for Small Taxpayers The safe harbor for small taxpayers SHST allows landlords to currently deduct all annual expenses for repairs, maintenance, improvements, and other costs for a rental building.
Routine Maintenance Safe Harbor Expenses that qualify for the routine maintenance safe harbor are automatically deductible in a single year, even if they would otherwise qualify as improvements that ordinarily must be depreciated over several years. De Minimis Safe Harbor Landlords may use the de minimis safe harbor to currently deduct any low-cost property items used in their rental business, regardless of whether or not the item would constitute a repair or an improvement under the regular repair regulations.
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