Generally, rental deductions have straightforward classifications and are deducted immediately. However, expenses for repairs and improvements are difficult to classify and have different deduction rules. As a result, the IRS has safe harbors that simplify the deduction rules in certain situations.
Rental Deductions: Repairs
Total repair amounts can be deducted in the same year they were paid. Examples of repairs include fixing a faucet, repainting a room, replacing a window, etc.
rental deductions: improvements
Generally, improvements are deducted over the useful life (27.5 years for residential rental properties) of the property. Examples of improvements include adding a bedroom and bathroom, replacing the furnace or flooring, etc.
Safe Harbors that Allow Immediate Deductions Regardless of Expense Classification
safe harbor for small taxpayers
Regardless if the expenses are for repairs or improvements, you can immediately deduct them if you meet the criteria of this safe harbor. The regulation applies to buildings, condominiums, and cooperatives with an unadjusted basis of $1 million or less (the limit applies to each property separately). Annual gross receipts must be $10 million or less. Further, the total amount paid for repairs, maintenance, improvements, and other similar expenses cannot exceed the lesser of $10,000 or 2% of the unadjusted basis of the building.
Example:
Jane owns and rents a condominium with an unadjusted basis of $163,000. In 2022, she paid, respectively, $1,000 and $1,500 to replace the furnace and water heater. In addition, Jane paid $100 to repair a window. Jane qualifies for the small taxpayer safe harbor because the $2,600 she spent on these improvements and repairs is less than 2% of her unadjusted basis (2%*163,000=$3,260).
safe harbor routine maintenance
You can immediately deduct expenses that are for routine maintenance. Examples of these expenses include repainting, cleaning, replacing parts, etc.
Specifically, for buildings, you must determine that you will perform the activities more than once in a 10-year period. For property other than buildings, you must expect to perform the activities more than once during the property’s class life – the number of years the property depreciates.
In addition, this safe harbor applies to certain restorations – replacement of a major component or substantial structural part.
IMPORTANT: However, the safe harbor does not apply to betterments, which include, for example, expanding the building size. Thus, betterment costs must be depreciated.
de minimis safe harbor
You can immediately deduct items that cost up to $2,500 ($5,000 if there are applicable financial statements). It does not matter if they were repairs or improvements.
