A free sample from chapter 2 Accounting Fundamentals of our Landlord / Property Management in QuickBooks guide. Section 2.12 What are Capital Improvements versus Repairs? We hope you’ll become a customer today, or sign up for the free e-course.
Caution: Have a conversation with your accountant about what he or she wants you to capitalize and what to expense. This is a grey area due to court rulings in which owners expensed some things (and got away with it) the IRS suggests one capitalize. Do your own homework and talk to your accountant.
Routine maintenance and repairs are not treated the same as capital improvements. This becomes very important when you enter the transactions into QuickBooks. Repairs go into QuickBooks one way (as expenses), while capital improvements go in another way (as increases to the value of your real estate assets). The following definitions are from IRS publication 527.
Repairs keep your property in good operating condition. They do not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. For instance, in a large rehab project if you repaint the walls (typically this is a repair) it is an improvement.
Capital Improvements add to the value of property, prolong its useful life, or adapt it to new uses. If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost can generally be depreciated as if the improvement were separate property.
The following Frequently Asked Questions are taken from the IRS’ website. The questions were current at time of publication. I suggest you ask the same questions to your accountant. It will help you learn how aggressive he or she is.
We have incurred substantial repairs to our rental property: new roof, gutters, windows, furnace, and outside paint. What are the IRS rules concerning depreciation? (This question comes from an FAQ from the IRS.)
Replacements of roof, rain gutters, windows, and furnace on a residential rental property are capital improvements to the structure because they materially add to the value of your property or substantially prolong its life. The items would be in the same class of property as the rental property to which they are attached. Since the property is residential rental property, the items are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention.
Repairs, such as repainting the residential rental property, are currently deductible expenses. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. In that case, you should capitalize and depreciate the repair costs as the same class of property that you have restored or remodeled as discussed above. For more information, refer to IRS Publication 527, Residential Rental Property and IRS Publication 946, How to Depreciate Property.
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