What is the difference between a Property Repair & a Property Improvement?

Wednesday September 2, 2015 comments


Real estate reporting it is one of the most complex areas when it comes to tax law. Let's learn about an important mistake many make when booking their costs:


It is common for improvements to the property to be incorrectly reported as a "repair". So what's the big deal? Well, these two types of cost are actually treated quite differently in the world of accounting and taxes.

| Repairs 101 |

A repair cost keeps your property in its normal operating condition. A repair can be immediately deducted (subtracted) from your income. The take-ways is: this cost is expensed now, and therefore reduces your net taxable income.

For example: The $200 cost to clean the carpets is a repair because all it does is keep the asset in normal operating condition.

| Improvements 101 |

In contrast, an improvement cost is capitalized as an asset. In other words: the cost adds value to your property. It is recognized as contributing to income-production instead of just a simple old fix that keeps the property in its normal operating condition.  Because the cost becomes an asset (a part your income-producing property) it is slowly deducted over a numbers of years rather than deducted all at once like a repair.

For example: A $900 cost to install a brand new carpet and carpet pad would be an improvement because it is adding value to the property. Then each year, you would deduct only a portion of this improvement. This is call depreciation of an asset.


WHY DOES THIS MATTER? Expensing too many costs as repair may make you more prone to an IRS audit. If your repair account is too large - it will draw their attention because expenses reduce net income, therefore reducing your amount of taxes owed.



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