Rental Property Capital Improvements You Can Write Off

Do you know what rental property capital improvements make for smart tax write-offs? IRS regulations change, so be up-to-date before getting to work.

Capital improvements are a hot topic for property owners right now. In 2014, the IRS issued substantial regulation changes and possible tax deductions. One of the major issues is how the IRS defines and categorizes two important words: "repairs" and "improvements." Generally speaking, the costs of rental property capital improvements must be deducted over time, up to 27.5 years. Repair costs, on the other hand, can be entirely written off in one year. 

How do you determine if you have rental property capital improvements or repairs? It depends on a few different sets of criteria, which we will break down for you here. 

What does the IRS consider a capital improvement to your property? 

New IRS regulations define a property improvement in three different ways: betterments, adaptations, and restorations. When your expenses fall into one of these three categories, your tax deductions are depreciated over time. 

For a basic understanding, you can think of "improvements" as any expense that increases the value or extends the life of the property. This goes for any new items that you add, replacements for old materials, or upgrading (as opposed to repairing) current items. 

Rental property capital improvements: what makes it a betterment? 

The expenses of "betterment" improvements generally describe any material addition to your rental property, for instance, if you put a new roof on a commercial building or make substantial repairs to it. 

• Improves a "material defect or condition" in the property that existed before it was acquired by its current owner or while he built it
• Physically extends or enlarges the property with a material addition
• Results in a "material increase" in the property's capacity, productivity, or quality 

Rental property capital improvements: what makes it an adaptation? 

Expenses are considered an "adaptation" when they seek to change the building space's use. You're altering your rental property in a way that is not consistent with its intended ordinary use or purpose.

For instance, if you bought the property and rented out commercial space to businesses but later decided to build an art gallery with live-in studios, the expenses of these changes would constitute an adaptation. 

Rental property capital improvements: what makes it a restoration? 

A "restoration" expense is a little more complicated. It covers several different situations of restoring or rebuilding the property in a substantial way. 

• Restores the building from disrepair back to a normal operating condition 
• Rebuilds the property to a brand new condition 
• Replaces a major component or structural part of the building
• Repairs damage the owner has taken as an adjustment for a casualty loss 

Examples of common improvements by property owners 

Under the new IRS regulations, the addition or upgrade of the following items will constitute a capital expense and depreciate for up to 27.5 years: 

Heating and air conditioning

• Heating system and central air conditioning 
• Furnace 
• Ductwork 
• Filtration system 

Lawn and grounds 

• Landscaping
• Driveway
• Walkway
• Fence
• Retaining wall
• Sprinkler system
• Swimming pool

Miscellaneous

• Storm windows and doors
• New roof
• Central vacuum
• Wiring upgrades
• Satellite dish
• Security system
• Attic, wall, and floor insulation