Distinguish: Rental Expense v. Improvement

Schedule L: Balance Sheet per Books 9a Buildings and other depreciable assets

Form 4562 Depreciation and Amortization

Deduct Improvements

From Pub 946 (2019), p.13:

How Do You Treat Repairs and Improvements?

If you improve depreciable property, you must treat the improvement as separate depreciable property. Improvement means an addition to or partial replacement of property that is a betterment to the property, restores the property, or adapts it to a new or different use. See section 1.263(a)-3 of the regulations.

You generally deduct the cost of repairing business property in the same way as any other business expense. However, if the cost is for a betterment to the property, to restore the property, or to adapt the property to a new or different use, you must treat it as an improvement and depreciate it.

Example. You repair a small section on one corner of the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it is a restoration of the building. You depreciate the cost of the new roof.

From Pub 946 (2019), p.34:

Additions and Improvements

An addition or improvement you make to depreciable property is treated as separate depreciable property. See How Do You Treat Repairs and Improvements in chapter 1 for a definition of improvements. Its property class and recovery period are the same as those that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. The recovery period begins on the later of the following dates.

  • The date you place the addition or improvement in service.

  • The date you place in service the property to which you made the addition or improvement.

Example. You own a rental home that you have been renting out since 1981. If you put an addition on the home and place the addition in service this year, you would use MACRS to figure your depreciation deduction for the addition. Under GDS, the property class for the addition is residential rental property and its recovery period is 27.5 years because the home to which the addition is made would be residential rental property if you had placed it in service this year.


Tax Treatment of Capital Expenditures

Because capital expenditures increase the value of your property, the IRS doesn’t treat them as expenses. To claim them on your taxes, you will need to depreciate them. Depreciation, which gets done on Form 4562, requires that you divide the amount you spent by 27.5 and write that amount off every year for 27 years with a half deduction in the 28th year. You will get your money back in tax deductions – it’s just that it will take more than 27 years.