Fun Asia Program Recording from Rauf Bajaria

Deducting an Improvement as a Repair

Tax Issue

Is it a repair or is it an improvement? Costs paid or incurred to repair property are currently deductible while costs to improve property are depreciated over the life of the property. With increased Section 179 deduction limits and bonus depreciation, businesses may not pay as much attention to what constitutes a repair versus an improvement. However, the increased depreciation expensing provisions were intended to be temporary.  As the provisions expire, determining what constitutes a repair, in order to maximize current business deductions, takes on added significance.

Applicable Tax Law

  • Repairs are costs that keep the property in good operations. Repairs are deductible as current expenses and are not depreciated.  Examples of repairs include repainting, replacing broken windows, fixing damaged carpet, preventative maintenance, fixing gutters, plastering, and sealing leaks.
  • Improvements result in a betterment of the property, restore a property, or adapt the property to a different use.  Improvements are depreciated and are not deductible as a current expense. Examples of improvements include remodeling, restoration, replacing a gravel driveway with concrete, installing an in-ground swimming pool, and constructing an addition.
  • Betterment of a property includes improving a condition or defect that either existed prior to the taxpayer’s acquisition of the property or arose during its production, a material addition to the property including physical enlargement, and a material increase in capacity, productivity, efficiency, strength, or quality of the property or its output.
  • Restoring a property includes replacing a property that was destroyed by casualty, returning the property to its ordinary operating conditions, rebuilding the property to like-new condition after the end of its economic useful life, and replacing a major component or structural part of the property.
  • The cost of an improvement is depreciated according to the MACRS class and recovery period of the underlying property.
  • Routine maintenance performed on a property is deemed to not improve that property.  Routine maintenance is defined as recurring activities that the taxpayer expects to perform more than once over the economic life of the property to maintain it’s ordinarily efficient operating condition.
  • One of the factors the courts have looked at to distinguish between deductible repairs and nondeductible capital improvements is whether the expenditure puts or keeps the property in an ordinary efficient condition.  If expenditures are made that ‘put’ the particular asset in efficient operating condition, then they are capital in nature.  If, however, they are made merely to ‘keep’ the asset in efficient operating condition, they constitute repairs and deductible.
  • Temporary regulations issued by the IRS in late 2011 clarify and expand standards for determining whether a particular expenditure is a repair or a capital improvement, provide rules for applying those standards, and provide guidance in financial record keeping for, and disposing, of depreciable property. For example, the temporary regulations allow a taxpayer to write off the value of building structural components and write them off when demolished or replaced. In addition, a taxpayer is allowed to identify repairs that had been capitalized under old rules and write off the remaining basis on the current tax return. Form 3115, Application for Change in Accounting Method, should be used to obtain automatic IRS consent to this type of financial record keeping method change.

Tax Planning Strategies

Business owners regularly make repairs and improvements to business property. Tax savings result when the expenditure can be classified as a repair and a current tax deduction claimed.

Strategies to consider that may provide additional support for repair deductions include:

  • Repair property at a separate time than when renovations are being made.
  • Make repairs while the property is being rented.
  • Use comparable materials to make repairs instead of more expensive materials.
  • Keep detailed records and documentation to substantiate the repair or improvement expenditures.
  • Have contractor provide an itemized list determining repairs and separately stated improvements and costs.
  • Write off building structural components that were demolished or replaced as part of a remodel.
  • Review expenditures previously classified as capital improvements to identify amounts that were actually incurred for repairs and maintenance and deduct the remaining value in the current year.


Example #1: John owns and leases an office building. The building is aging and in need of repairs. The floor needs to be repaired, an area of the ceiling needs to be patched, and some of the offices need to be repainted. John is also considering an overall plan of building renovations which include upgrading the wiring and plumbing and installing new windows. Normally, the painting, patching, and floor work are repair expenses, while the wiring and plumbing upgrade and new windows are improvements. However, if all the work is preformed at the same time, the repairs could be viewed as part of the general plan of renovating the building, and the cost of those repairs would be capitalized and depreciated over 39 years.

Example #2: Sandy owns a rental house and the roof on the unit is leaking. Sandy is comparing the costs and benefits of fixing the leaking roof with replacing the entire roof. Sandy can deduct the cost of repairing the leak as a rental expense. However, if Sandy completely replaces the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Sandy must capitalize and depreciate the cost of a new roof.

Possible Risks

  • No bright line test exists to classify repairs and improvements.  There are many grey areas in defining repairs and improvements. All facts and circumstances need to be reviewed to determine whether a current deduction or capitalization is the appropriate tax treatment.
  • Expenses that are incurred as part of an overall plan of renovating or improving a piece of property will generally be considered an improvement and capitalized, even though certain portions of the work, when considered separately, might be classified as a repair. The IRS states, in its Capitalization v Repairs Audit Technique Guide, “Whether a general plan of rehabilitation exists, and whether a particular repair or maintenance item is part of it, are questions of fact to be determined based upon all the surrounding facts and circumstances, including, but not limited to, the purpose, nature, extent, and value of the work done. The existence of a written plan, by itself, is not sufficient to trigger the plan of rehabilitation doctrine.”
  • Homeowners with no business use of the home do not benefit when an expenditure is classified as a repair rather than an improvement.  Repairs are nondeductible personal expenses, while an improvement increases the basis of the home and reduces any potential gain on the sale of the home.
  • The provisions of REG-168745-03, Revenue Procedure 2012-19, and Revenue Procedure 2012-20 are new and untested. Careful documentation must be made when reclassifying previously capitalized amounts as repairs or identifying demolished or replaced structural components. A separate Form 3115 must be filed to identify each such change, and the detailed instructions outlined in the two Revenue Procedures must be followed.

Court Case

Court Case: The taxpayer purchased a four-unit house for rental purposes at a cost of $30,000. At the time of purchase, one of the units was being rented while the other three were vacant. The property as a whole was in disrepair. The taxpayer paid $6,247 to a contractor who made various repairs to the property. The repairs included trimming limbs from trees that were rubbing the roof, repairing water damage, patching holes in the walls, repairing damaged electrical wiring, cleaning the carpeting, floors, and the exterior of the property, repairing the porch, replacing electrical fixtures, and installing new cabinet doors and a new countertop. The taxpayer claimed the $6,247 as a current deduction for repairs. The IRS disagreed disallowing the deduction and claimed the entire amount should be capitalized.  The taxpayer’s testimony established that his purpose in having the work done was to keep the property in an operating condition over its probable useful life for which it was purchased, not to prolong the life of the property or make it adaptable to a different use.  The court noted that although the property was in poor condition at the time of purchase, one of the units was being rented. The evidence indicates that most of the work consisted of incidental repairs necessary to keep the building in an ordinarily efficient operating condition.  The court did not believe the work performed was part of a general plan of renovation of the property. The court also noted that the repairs cost of $6,247 were not material compared to the $30,000 purchase price. The taxpayer was charged a lump sum for all the work done on the property with no breakdown of each item. The court made a rough estimate of the repair items and allowed $5,000 of the expenses as currently deductible repairs and required capitalization of $1,247 paid for new cabinet doors, electrical fixtures, and kitchen counters. (Jacobson, T.C. Memo 1983-719, December 1, 1983)