Whenever you repair or replace something in a rental unit or building, you must decide whether the expense is a repair or improvement for tax purposes. Why is it important? Because you can deduct the cost of a repair in a single year, while you have to depreciate improvements by up to 27.5 years. For business assets, you usually want repairs, not improvements. With repairs, you'll get your deductions sooner, which means more money in your pocket now instead of later.
A repair is performed to restore an item to its previous state. Therefore, you can deduct the total cost of the repair in the tax year in which the repair was completed from rental income received in the same period. Sometimes, losses caused by repairs can be carried over to later years. That said, there is a big difference between repairs and improvements when it comes to your taxes.
While you can deduct repairs in full from current year's taxes, you are not allowed to deduct the full expense of an upgrade right away. You'll have to do it slowly over time. Repairs are usually one-off repairs that keep your property in its current condition. While cost is not a factor in determining a repair or improvement, repairs are often small and inexpensive.
Common repairs can include basic maintenance, such as unclogging a shower drain or repairing a hole in the wall. According to the IRS, most repairs don't add significant value to the property or extend the life of the property. The repair simply keeps the house in its current state. In general, painting between tenants is considered a repair.
However, if the painting is part of a larger restoration project or an addition, then it becomes an improvement. A capital upgrade would include major work, such as restoring the kitchen, converting a room or installing a greenhouse. On the other hand, a repair is general maintenance, for example, repairing a faucet, repainting surfaces, repairing air conditioning, or maintaining appliances. The cost of repairs and maintenance can be deducted at the end of the fiscal year.
Landlords can 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 improvement under regular repair regulations.