Budgeting for capital expenditures and replacement reserves per unit
The reliable way to set a replacement reserve is to list your building's big components, estimate what each will cost to replace and how many years it has left, and save cost divided by years left for each. Add them up and divide by the number of units to get a per-unit figure. A rule-of-thumb dollar amount per unit cannot know that your roof has five years left; your own list can.
Capital expenditure vs repairs
Capital expenditures (capex) are spending that betters, restores or adapts the property, such as a new roof, a new heating system or new flooring. Ordinary repairs keep it in working order. For taxes, the IRS treats improvements as capital costs that are generally depreciated; residential rental property uses the straight line method over 27.5 years under the general system, and land is not depreciated (IRS Publication 527).
The IRS defines the three kinds of improvement: a betterment fixes a pre-existing defect, enlarges or materially increases capacity or quality; a restoration replaces a major component or substantial structural part, or rebuilds to like-new; an adaptation converts the property to a new use (IRS tangible property regulations). Your reserve is for exactly these big, predictable items.
Step 1: list the components
Walk the building and write down every component that is expensive and wears out on a predictable schedule:
- Roof and gutters
- Boilers, furnaces, rooftop units and water heaters
- Parking lot, sidewalks and drainage
- Windows, exterior doors and siding or paint
- Unit appliances, flooring, cabinets and counters
- Electrical service, plumbing risers and laundry equipment
Leave out small, frequent items such as faucets, light fixtures and paint touch-ups. Those belong in the operating budget, because they recur every year and do not need years of saving.
For each, note its age, its typical life (ask the installer or manufacturer, or look at the warranty), and a replacement cost from a current quote. If you bought the building recently, the property condition report from your purchase is a good starting list.
Step 2: divide cost by years left
Example a made-up 16 unit building. All costs and lives below are invented for the example; use quotes for your own.
| Component | Replacement cost | Years left | Save per year |
|---|---|---|---|
| Roof | $96,000 | 15 | $6,400 |
| Water heaters (16 x $1,800) | $28,800 | 6 | $4,800 |
| Parking lot resurface | $24,000 | 8 | $3,000 |
| Boiler | $60,000 | 12 | $5,000 |
| Unit appliances (16 x $2,400) | $38,400 | 8 | $4,800 |
| Unit flooring (16 x $3,000) | $48,000 | 10 | $4,800 |
| Total | $295,200 | $28,800 |
In this example the building should save $28,800 a year, which is $2,400 a month, or $1,800 per unit per year ($150 per unit per month). The per-unit number is a result of the list, not an input.
Step 3: check the timing, not just the total
Averages hide crunch years. Lay the replacements on a calendar and run the reserve balance forward. If a large item comes due before the reserve can cover it, save more now, plan to replace it in phases (water heaters as they fail rather than all at once), or line up financing in advance.
Example in the made-up building above, the reserve starts at $20,000. The water heaters are due in year 6, but suppose half of them (8 x $1,800 = $14,400) fail in year 3. By then the reserve has $20,000 + 3 x $28,800 = $106,400 before spending, so it covers the $14,400 and still holds $92,000. Without the starting $20,000 and the monthly transfers, those failures would come out of operating cash.
Step 4: run the reserve
- Open a separate savings account for each property's reserve, so the money is not spent on operations by accident.
- Transfer the monthly amount on the same day each month, right after rent comes in.
- Pay capital replacements from the reserve and record them as improvements, with the invoice.
- Update the component list once a year: replace actual costs, push lives out for items in good shape, and recalculate.
Note the tax timing: moving money into a reserve account is not a deductible expense. The deduction comes later, when you spend it, usually through depreciation of the improvement. Some smaller items may be deductible right away under IRS safe harbors such as the $2,500 de minimis election. Ask your tax preparer which applies.
Lenders may require their own reserve deposits for a loan. Follow your loan documents; they can differ from your own plan.
Reserves in DoorKeeping
Because one LLC owns one property in DoorKeeping, each building's books and bank account are its own, which keeps each reserve tied to the building it is for. You can ask Claude or ChatGPT, connected to DoorKeeping, what a property spent on improvements versus repairs this year, or what its net operating income is before reserves. Transfers and payments wait for your one-tap approval.
Sources
- IRS, Publication 527, Residential Rental Property, read Oct 29, 2026
- IRS, Tangible Property Final Regulations, read Oct 29, 2026
Questions
- How much should I set aside for capex per unit?
- Work it out from your own building: list each major component, divide its replacement cost by its years left, add them up and divide by the number of units.
- Are replacement reserves tax deductible?
- No. Moving money into a reserve is not an expense. You deduct the cost when it is spent, usually through depreciation if it is an improvement. Ask your tax preparer.
- Is a new roof capex or a repair?
- Replacing a whole roof is generally an improvement, so it is capex and is depreciated. Patching a leak is a repair. IRS Publication 527 lists a new roof among its improvement examples.