Repairs vs. Improvements for Residential Rental Property: An IRS Guide for Landlords

If you own residential rental property, knowing the difference between repairs and improvements is one of the most important (and misunderstood) parts of rental property taxation. The distinction directly affects when you get the tax benefit—now or over time.

The IRS does give us clear guidance. Once you understand the framework, the rules become much easier to apply in real life.

Why This Matters

• Repairs are generally deductible in the year paid.

• Improvements must be capitalized and depreciated, usually over 27.5 years for residential rental property.

Classifying an expense incorrectly can lead to missed deductions—or problems in an audit. Let’s break it down.

The IRS Framework: Repairs vs. Improvements

The IRS uses what’s commonly called the BAR Test to determine whether an expense is an improvement. An expense is an improvement if it results in a:

• Betterment

• Adaptation

• Restoration

If it meets any one of these tests, it’s an improvement. If it doesn’t, it’s generally a repair.

What Counts as a Repair?

A repair keeps the property in ordinary, efficient operating condition. It fixes something that is broken, worn, or damaged—but does not add significant value or extend the overall life of the property.

Common Repair Examples

• Fixing a leaky faucet

• Repairing a furnace or water heater

• Replacing broken window glass

• Patching drywall

• Repainting between tenants (no upgrade)

• Fixing a clogged drain

• Replacing a few roof shingles

• Repairing a small section of flooring

Key idea: Repairs maintain the property. They don’t upgrade it.

What Counts as an Improvement?

An improvement does at least one of the following: makes the property better, adapts it to a new use, or restores a major component.

1. Betterments

An expense is a betterment if it:

• Fixes a material defect that existed before purchase, or

• Upgrades the property beyond its original condition

Examples:

• Upgrading laminate flooring to hardwood

• Installing higher-end countertops

• Adding insulation beyond original specifications

• Replacing standard HVAC with a high-efficiency system

2. Adaptations

An expense is an adaptation if it changes the property to a new or different use.

Examples:

• Converting a garage into living space

• Turning a single-family home into a duplex

• Remodeling a space for a business tenant

3. Restorations

An expense is a restoration if it replaces a major component or brings the property back to like-new condition.

Examples:

• Replacing an entire roof

• Replacing all plumbing or electrical systems

• Installing a brand-new HVAC system

• Rebuilding after significant damage

• Replacing all windows at once

If you replace a major system or substantial structural part, the IRS considers it an improvement.

The Unit of Property Rule (Often Overlooked)

The IRS doesn’t look at individual screws and pipes—it looks at systems, known as units of property.

For residential rental property, major units of property include:

• Roof

• HVAC

• Plumbing

• Electrical

• Structural components

Example:

• Replacing a few shingles → Repair

• Replacing the entire roof → Improvement

This distinction is critical when evaluating large projects.

IRS Safe Harbors That Help Landlords

The IRS provides several safe harbor rules that can allow you to deduct expenses that might otherwise be capitalized.

De Minimis Safe Harbor

• Allows you to expense items costing $2,500 or less per invoice or per item

• Requires a written accounting policy

This can be extremely helpful for smaller improvements.

Routine Maintenance Safe Harbor

Applies to costs that:

• Are expected to be performed more than once every 10 years, and

• Keep the property operating normally

Examples include repainting, HVAC servicing, and minor plumbing work.

Small Taxpayer Safe Harbor

If you:

• Have average annual gross receipts of $10 million or less, and

• Own a property with an unadjusted basis of $1 million or less

You may deduct repairs and improvements up to the lesser of:

• $10,000, or

• 2% of the property’s unadjusted basis

This rule can be very powerful for small landlords.

Repairs vs. Improvements: Quick Comparison

Expense	IRS Treatment
Fixing a leak	Repair
Replacing all plumbing	Improvement
Repainting walls	Repair
Installing new flooring	Improvement
Replacing a furnace motor	Repair
Replacing entire HVAC	Improvement
Patching a roof	Repair
Full roof replacement	Improvement

A Practical Rule of Thumb

When deciding how to classify an expense, ask:

Did this fix or maintain the property—or did it upgrade or replace a major system?

• Fix or maintain → Repair

• Upgrade or replace a major component → Improvement

Final Thoughts

Correctly distinguishing between repairs and improvements can significantly impact your tax liability and cash flow as a rental property owner. When in doubt, documentation and professional guidance matter.

If you own rental property and want help applying these rules to your specific situation—or want to make sure you’re maximizing deductions while staying compliant—professional tax advice is well worth it. At Casler Financial, we offer advisory sessions where we can help with your specific tax questions and unique situations. Schedule online here: https://www.caslerfinancial.com/scheduling