Rental Property – Repairs vs. Improvements – What is the difference?
Incidental repairs to real property used in a trade or business, including a real estate business, are deductible under § 162 if the cost thereof does not materially add to the value of the property nor appreciably prolong its life.717 The same principle applies to repairs to real property held for the production of income.718
Repairs that are in the nature of replacements, to the extent they arrest deterioration and appreciably prolong the life of the property, must be capitalized.719 The cost of a repair that is in fact part of the cost of acquiring or constructing real property is not deductible but must be capitalized.720 The capitalization limitation is described in III, E, 6, below.
(II) EFFECT OF DEPRECIATION AND AMORTIZATION
It does not matter that the property being repaired has been fully depreciated through tax deductions claimed in previous years.721 It does not matter that in a particular year the total repair expenditures exceed the annual average.722
(III) RECENTLY ACQUIRED PROPERTY
A repair deduction is not precluded merely because the property has been recently acquired.723 However, the expenditures must be capitalized if they prepare the property for a new use,724 recondition the property,725 or are made pursuant to an obligation under the purchase contract,726 or if the property is not suitable for any use when it is acquired.727 The capitalization limitation is described in III, E, 6, below.
(B) EXPENDITURE REQUIRED
No deduction is allowed for the estimated cost of repairs that have not been made.728 No deduction is allowed for the value of the taxpayer's own labor in making the repairs.729
(C) TYPE OF EXPENDITURES
An expenditure does not qualify for a § 162 or Section 212 deduction if it is part of a plan of activity that materially adds to the value of the property or appreciably prolongs its life, but it does qualify if it is necessary to maintain property in acceptable operating condition.730 Thus, the mere fact that the expenditure is for a particular type of activity does not necessarily make the expenditure deductible.731
Example: The cost of replacing a broken electric switch in a motel room usually constitutes a § 162 or § 212 repair deduction, but the cost of replacing all of the electric switches in the motel as part of a major rehabilitation must be capitalized together with the cost of the other rehabilitation work.
Observation: A taxpayer increases the chances that an expenditure will be upheld as a repair deduction if the expenditure is not made at the same time as substantial improvements are being made or when a general plan of building renovation is underway. It is helpful to obtain separate invoices for repair expenditures rather than having one contractor include multiple repairs and even improvement costs on one bill. A prudent real estate owner documents the reason for the repair, including a description of the problem that the repair is intended to correct.
The types of expenditures incurred with respect to real property for which a repair deduction has been allowed when capitalization was not required include the following:
-- Brick pointing;732
-- Brush clearing to negate overgrowth;733
-- Cleaning exterior walls of a building;734
-- Cleaning interior of run-down building;735
-- Cutting out concrete cracks;736
-- Dismantling unsafe partition;737
-- Dredging fill washed into property by storm;738
-- Drilling and grouting subsoil to prevent collapse of building threatened by sudden shifting of subsoil and resulting cave-in of factory floor;739
-- Eliminating hump in driveway entrance;740
-- Encapsulating damaged asbestos insulation;741
-- Filling and grading property to alleviate water seepage caused by construction on adjacent property;742
-- Filling concrete cracks;743
-- Installation of steel columns and cross members to support sagging floor;744
-- Insulating above a roof;745
-- Insulating house;746
-- Makeshift repair of floor;747
-- Maintenance of golf course;748
-- Maintenance of septic tank system;749
-- Mortar pointing;750
-- Moving and rearranging partitions;751
-- Painting an interior room;752
-- Painting the exterior of a building;753
-- Painting the interior of a building;754
-- Painting roof;755
-- Painting window sash;756
-- Patching floors;757
-- Patching porch;758
-- Patching roof;759
-- Plastic finish on building canopy;760
-- Plastering a room;761
-- Pouring concrete over pre-existing floor to restore its use;762
-- Recrowning road;763
-- Reflashing a roof;764
-- Relining walls and floor of basement with concrete to prevent oil seepage from neighboring refinery;765
-- Removal of damaged building cornice;766
-- Removal of damaged windows;767
-- Repaving parking lot;768
-- Repainting the exterior of a building;769
-- Repairing building damage caused by storm;770
-- Repairing building damage caused by water seepage;771
-- Repairing ceilings;772
-- Repairing counters;773
-- Repairing dam to stop leaks;774
-- Repairing doors;775
-- Repairing driveway;776
-- Repairing electrical wiring;777
-- Repairing fences;778
-- Repairing foundation;779
-- Repairing floor;780
-- Repairing foundation piles after sudden recession of river;781
-- Repairing gutters;782
-- Repairing plaster;783
-- Repairing plumbing;784
-- Repairing railings;785
-- Repairing roads after storms;786
-- Repairing roof damaged by wind;787
-- Repairing shingles;788
-- Repairing stairs;789
-- Repairing stairway;790
-- Repairing steps;791
-- Repairing the parapet walls of a building;792
-- Repairing the roof of a building;793
-- Repairing wharf;794
-- Replacing broken glass;795
-- Replacing damaged building cornice;796
-- Replacing glass panes;797
-- Replacing areas of carpet that are worn or threadbare;798
-- Replacing part of ceiling;799
-- Replacing part of floor;800
-- Replacing retaining wall after collapse;801
-- Replacing wall damaged by demolition of adjoining buildings;802
-- Replacing wall with iron beam supported by iron posts to compensate for damage caused by use of heavy machinery;803
-- Replacing windows damaged by water leaks;804
-- Replacing wooden sidewalk supporting timbers to prevent collapse threatened by basement excavation;805
-- Replastering room;806
-- Resetting skylights;807
-- Restoring roof supports shifted by sudden sinking of filled ground and threatening collapse of building;808
-- Restoring underpinning of building built over canal caused by water damage;809
-- Resurfacing parking lot with same material;810
-- Resurfacing the roof of a building with materials that would last only one year;811
-- Scarifying road;812
-- Shoring up wall after foundation exposed by sudden river recession;813
-- Soil remediation and groundwater treatment to remove toxic waste and restore land to pre-contamination condition.814
-- Straightening steel window sash;815
-- Structural repairs to stop roof leakage;816
-- Survey to reestablish boundary after fence damaged by storm;817
-- Temporary electrical installation after fire;818
-- Temporary improvements to permit immediate use of new building to comply with forced sale of old building;819
-- Tree trimming;820
-- Tuck pointing the exterior walls of a building;821 and
-- Whitewashing a building.822
Citations for footnotes:
n717 Regs. Section 1.162-4.
n718 Section 212(2); Regs. Section 1.212-1(n).
n719 Section 263; Regs. Section 1.162-4.
n720 Regs. Section 1.162-4.
n721 E.g., Clark v. Comr., 25 T.C.M. 118, 120 (1966).
n722 Henderson Cotton Mills v. Comr., 4 B.T.A. 1212, 1213 (1926), acq., 1927-1 C.B. 3.
n723 E.g., Mills v. Comr., 4 T.C.M. 863, 863 (1945).
n724 E.g., H.S. Crocker Co., Inc. v. Comr., 15 B.T.A. 175, 182 (1929), acq., 1929-2 C.B. 12; Allen v. Comr., 2 B.T.A. 1313, 1314 (1925), acq., 1926-1 C.B. 1.
n725 E.g., L.A. Wells Construction Co. v. Comr., 46 B.T.A. 302, 308 (1942), aff'd, 134 F.2d 623 (6th Cir. 1943), cert. denied, 319 U.S. 771(1943).
n726 H. Wilensky & Sons Co. v. Comr., 7 B.T.A. 693, 696 (1927).
n727 E.g., Coca-Cola Bottling Works v. Comr., 19 B.T.A. 1055, 1056 (1930).
n728 Federal Plate Glass Co. v. Comr., 6 B.T.A. 351, 358 (1927), acq., 1927-2 C.B. 2.
n729 Clark v. Comr., 25 T.C.M. 118, 119 (1966).
n730 Moss v. Comr., 831 F.2d 833, 842 (9th Cir. 1987), rev'g 51 T.C.M. 742 (1986).
n731 Id. at 842.
n732 Thurner v. Comr., 11 T.C.M. 42, 46 (1952).
n733 Rev. Rul. 75-135, 1975-1 C.B. 56.
n734 City Nat'l Bank v. Comr., 11 T.C.M. 411, 413 (1952).
n735 Jacobson v. Comr., 47 T.C.M. 499, 502 (1983).
n736 Universal Mills v. Comr., 7 T.C.M. 886, 890 (1948).
n737 Schmid v. Comr., 10 B.T.A. 1152, 1152 (1928), acq., 1928-2 C.B. 36.
n738 Tampa Electric Co. v. Comr., 12 B.T.A. 1002, 1008 (1928), acq., 1928-2 C.B. 39.
n739 American Bemberg Corp. v. Comr., 10 T.C. 361, 378 (1948), aff'd per curiam, 177 F.2d 200 (6th Cir. 1949).
n740 Almac's Inc. v. Comr., 20 T.C.M. 56, 59 (1961).
n741 TAM 9411002.
n742 Southern Ford Tractor Corp. v. Comr., 29 T.C. 833, 845 (1958), acq., 1958-2 C.B. 7.
n743 Universal Mills v. Comr., 7 T.C.M. 886, 890 (1948).
n744 Regenstein v. Edwards, 121 F. Supp. 952, 954 (M.D. Ga. 1954).
n745 Munroe Land Co. v. Comr., 25 T.C.M. 3, 7 (1966).
n746 Rice v. U.S., 75-1 USTC Para.9207 (D. Mont. 1975).
n747 Standard Fruit Product Co. v. Comr., 8 T.C.M. 733, 739 (1949).
n748 Berglund v. U.S., 81-1 USTC Para.9192 (D. Minn. 1981).
n749 Cooper v. Comr., 42 T.C.M. 418, 423 (1981).
n750 Thurner v. Comr., 11 T.C.M. 42, 45 (1952).
n751 Neuberger v. Comr., 2 B.T.A. 911, 912 (1925), acq., 1925-2 C.B. 4.
n752 Luce Furniture Co. v. Comr., 9 B.T.A. 1413, 1418 (1928), acq., 1928-2 C.B. 24; O'Madigan v. Comr., 19 T.C.M. 1178, 1186 (1960), aff'd on other issues, 300 F.2d 154 (6th Cir. 1962).
n753 O'Madigan v. Comr., 19 T.C.M. 1178, 1186 (1960), aff'd on other issues, 300 F.2d 154 (6th Cir. 1962).
n754 Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926).
n755 Potter v. Comr., 20 B.T.A. 252, 254 (1930), nonacq., 1931-1 C.B. 90.
n756 Buckland v. U.S., 66 F. Supp. 681, 683 (D. Conn. 1946).
n757 Potter v. Comr., 20 B.T.A. 252, 254 (1930), nonacq., 1931-1 C.B. 90.
n758 Id.
n759 Id.
n760 Gilles Frozen Custard, Inc. v. Comr., 29 T.C.M. 311, 317 (1970).
n761 Standard Fruit Product Co. v. Comr., 8 T.C.M. 733, 739 (1949).
n762 Hudlow v. Comr., 30 T.C.M. 894, 923 (1971).
n763 Pennock Plantation, Inc. v. Comr., 10 T.C.M. 1077, 1080 (1951).
n764 Fidelity Storage Corp. v. Burnet, 58 F.2d 526, 528 (D.C. Cir.1932), rev'g 18 B.T.A. 517 (1929).
n765 Midland Empire Packing Co. v. Comr., 14 T.C. 635, 642 (1950), acq., 1950-2 C.B. 3.
n766 Commodore, Inc. v. Comr., 46 B.T.A. 718, 724 (1942), acq. in part, 1942-1 C.B. 4, nonacq. in part, 1942-1 C.B. 21, aff'd, 135 F.2d 89(6th Cir.1943).
n767 Buckland v. U.S., 66 F. Supp. 681, 683 (D. Conn. 1946).
n768 Coors v. Comr., 60 T.C. 368, 404 (1973), acq., 1974-2 C.B. 2, aff'd on other issues sub nom. Adolph Coors Co. v. Comr., 519 F.2d 1280 (10th Cir. 1975), cert. denied, 423 U.S. 1087 (1976).
n769 Potter v. Comr., 20 B.T.A. 252, 254 (1930), nonacq., 1931-1 C.B. 90; Watts v. Comr., 34 T.C.M. 613, 615 (1975); Cohen v. Comr., 7 T.C.M. 681, 684 (1948).
n770 Tampa Electric Co. v. Comr., 12 B.T.A. 1002, 1008 (1928), acq., 1928-2 C.B. 39.
n771 Farmer's Creamery Co. of Fredericksburg, Va. v. Comr., 14 T.C. 879, 883 (1950), nonacq., 1954-1 C.B. 8.
n772 Mason Cotton Mill Co. v. Comr., 1 B.T.A. 449, 450 (1925), acq., 1925-1 C.B. 3.
n773 Schmid v. Comr., 10 B.T.A. 1152, 1152 (1928), acq., 1928-1 C.B. 36.
n774 Evans v. Comr., 557 F.2d 1095, 1101 (5th Cir. 1977), rev'g 33 T.C.M. 1192 (1974), supp., 34 T.C.M. 783 (1975).
n775 Marcell v. U.S., 61-2 USTC Para.9628 (D. Vt. 1961).
N776 Mogg Coal & Coke Co. v. Comr., 10 B.T.A. 588, 590 (1928), acq., 1928-1 C.B. 22.
n777 Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926).
n778 Coors v. Comr., 60 T.C. 368, 404 (1973), acq., 1974-2 C.B. 2, aff'd on other issues sub nom. Adolph Coors Co. v. Comr., 519 F.2d 1280 (10th Cir. 1975), cert. denied, 423 U.S. 1087 (1976); Tennessee Securities, Inc. v. Comr., 37 T.C.M. 1803, 1815 (1978), aff'd on other issues, 674 F.2d 570(6th Cir. 1982); Union Packing Co. v. Comr., 14 T.C.M. 1188, 1206 (1955), aff'd in part & rev'd in part on other issues sub nom. Union Stock Farms v. Comr., 265 F.2d 712 (9th Cir. 1959).
n779 Saurini v. Comr., 46 T.C.M. 1206, 1208 (1983).
n780 Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926);Polyak v. Comr., 94 T.C. 337, 348 (1990); Mason Cotton Mill Co. v. Comr., 1 B.T.A. 449, 449 (1925), acq., 1925-1 C.B. 3.
n781 Illinois Merchants' Trust Co. v. Comr., 4 B.T.A. 103, 107 (1926), acq., 1926-2 C.B. 2.
n782 Auerbach v. Comr., 2 B.T.A. 67, 69 (1925), acq., 1925-2 C.B. 1.
n783 Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926).
n784 Id.
n785 Windsberg Est. v. Comr., 37 T.C.M. 455, 457 (1978).
n786 Alexander Mfg. Co. v. Comr., 9 B.T.A. 347, 351 (1927), acq., 1928-1 C.B. 1.
n787 Gerald W. Pontel Family Est. v. Comr., 42 T.C.M. 113, 116 (1981).
n788 Mason Cotton Mill Co. v. Comr., 1 B.T.A. 449, 450 (1925), acq., 1925-1 C.B. 3.
n789 Windsberg Est. v. Comr., 37 T.C.M. 455, 457 (1978).
n790 Saurini v. Comr., 46 T.C.M. 1206, 1208 (1983).
n791 Mason Cotton Mill Co. v. Comr., 1 B.T.A. 449, 450 (1925), acq., 1925-1 C.B. 3.
n792 Thurner v. Comr., 11 T.C.M. 42, 46 (1952).
n793 Fidelity Storage Corp. v. Burnet, 58 F.2d 526, 528 (D.C. Cir.1932), rev'g 18 B.T.A. 517 (1929); Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926); Hable v. Comr., 48 T.C.M. 1079, 1081 (1984); Thurner v. Comr., 11 T.C.M. 42, 46 (1952); Oklahoma Transportation Co. v. U.S., 272 F. Supp. 729, 731 (D. Okla. 1966).
n794 Consumers' Coal Co. v. Comr., 10 B.T.A. 851, 851 (1928), acq., 1928-1 C.B. 7.
n795 Rose v. Haverty Furniture Co., 15 F.2d 345, 346 (5th Cir. 1926);J.F. Wilcox & Sons v. Comr., 28 B.T.A. 878, 881 (1933), nonacq., 1933-2 C.B. 27.
n796 Commodore, Inc. v. Comr., 46 B.T.A. 718, 724 (1942), acq. in part., 1942-1 C.B. 4, nonacq. in part, 1942-1 C.B. 21, aff'd, 135 F.2d 89(6th Cir. 1943).
n797 Clark v. Comr., 25 T.C.M. 118, 119 (1966).
n798 Beck v. Comr., 67 T.C.M. 2469, 2473 (1994), aff'd by unpub. opin. (4th Cir. 1995).
n799 Schmid v. Comr., 10 B.T.A. 1152, 1152 (1928), acq., 1928-2 C.B. 36.
n800 Sanford Cotton Mills v. Comr., 14 B.T.A. 1210, 1213 (1929), acq., 1929-2 C.B. 46; Schmid v. Comr., 10 B.T.A. 1152, 1152 (1928), acq., 1928-2 C.B. 36.
n801 Henderson Cotton Mills v. Comr., 4 B.T.A. 1212, 1213 (1926), acq., 1927-1 C.B. 3.
n802 Thomas v. Comr., 21 T.C.M. 708, 710 (1962).
n803 National Weeklies, Inc. v. Comr., 10 B.T.A.M. 208, 209 (1941), aff'd, 137 F.2d 39 (8th Cir. 1943).
n804 Buckland v. U.S., 66 F. Supp. 681, 683 (D. Conn. 1946).
n805 Forgeus v. Comr., 6 B.T.A. 291, 293 (1927), acq., 1927-2 C.B. 3.
n806 O'Madigan v. Comr., 19 T.C.M. 1178, 1186 (1960), aff'd on other issues, 300 F.2d 154(6th Cir. 1962).
n807 Fidelity Storage Corp. v. Burnet, 58 F.2d 526, 528 (D.C. Cir.1932), rev'g 18 B.T.A. 517 (1929).
n808 Gopcevic v. Comr., 3 T.C.M. 1216, 1217 (1944).
n809 Claremont Waste Mfg. v. Comr., 4 T.C.M. 301, 303 (1945).
n810 Toledo Home Federal S & L Assn. v. U.S., 318 F.2d 292, 292 (6th Cir. 1963), aff'g on other issues 203 F. Supp. 491 (N.D. Ohio 1962); Almac's Inc. v. Comr., 20 T.C.M. 56, 59 (1961).
n811 Ohio-Kentucky Loose Leaf Tobacco Warehouse Co. v. Comr., 10 T.C.M. 11, 13 (1951).
n812 Pennock Plantation, Inc. v. Comr., 10 T.C.M. 1077, 1079 (1951).
n813 Illinois Merchants' Trust Co. v. Comr., 4 B.T.A. 103, 107 (1926), acq., 1926-2 C.B. 2.
n814 Rev. Rul. 94-38, 1994-1 C.B. 35.
n815 Buckland v. U.S., 66 F. Supp. 681, 682 (D. Conn. 1946).
n816 Oberman Mfg. v. Comr., 47 T.C. 471, 482 (1967), acq., 1967-2 C.B. 3.
n817 Vogel v. Comr., 47 T.C.M. 1360, 1361 (1984).
n818 Ticket Office Equipment Co., Inc. v. Comr., 20 T.C. 272, 279 (1953), acq., 1953-2 C.B. 6, aff'd per curiam, 213 F.2d 318 (2d Cir. 1954).
n819 Buedingen v. Comr., 6 B.T.A. 335, 337 (1927), acq., 1927-2 C.B. 1.
n820 Rev. Rul. 75-135, 1975-1 C.B. 56.
n821 City Nat'l Bank v. Comr., 11 T.C.M. 411, 413 (1952).
n822 Kurtz v. Comr., 8 B.T.A. 679, 684 (1927), acq., 1928-1 C.B. 8.