Is a vendor invoice for my rental a repair or an improvement?
A repair keeps the property in its ordinary working condition and is generally deducted in the year you pay it. An improvement makes the property better, restores it, or adapts it to a new use, and must be capitalized and depreciated over time. The IRS describes the test in Publication 527. When an invoice mixes both, ask the vendor to split the lines, and ask your tax preparer about the safe harbors. This is general information, not tax advice.
The test in plain words
IRS Publication 527 says you can deduct the cost of repairing or maintaining your rental property if you are not required to capitalize it, and that you must capitalize an expense that results in a betterment, restores the property, or adapts it to a new or different use.
| Question | If yes, it leans toward | Example |
|---|---|---|
| Does it keep things working as they were? | Repair | Fix a leaking faucet, patch drywall, replace a broken window pane |
| Does it make the property better than before? | Improvement | Add a bathroom, upgrade to a larger or better system |
| Does it restore something that was worn out or gone? | Improvement | Replace a whole roof or the whole HVAC system |
| Does it adapt the property to a new use? | Improvement | Convert a garage into a living unit |
The tests have exceptions and safe harbors, such as small-cost and routine maintenance rules. The right answer for your case comes from your tax preparer.
Common landlord invoices, sorted
Think of each line of an invoice, not the whole invoice. A turn can include both kinds of work.
- Repainting a unit between tenants: generally a repair or maintenance.
- Replacing a broken water heater with a similar one: this is often an improvement because you replace a major component, so ask your preparer.
- Patching a leak in a roof: usually a repair. Replacing the roof: an improvement.
- Replacing worn carpet in one room with carpet: often a repair. Replacing all flooring in a building with a higher grade: leans toward improvement.
- Adding a washer and dryer hookup: an improvement.
Example a made-up invoice for unit 2A shows $400 to patch and paint walls, $950 to replace a worn-out furnace, and $120 for a lock change. The patching and lock change are generally repairs, $520 deducted this year. The furnace is a $950 replacement that may have to be capitalized and depreciated, depending on your preparer's view and the safe harbors. The one invoice goes into two accounts.
Safe harbors worth asking about
Publication 527 mentions a de minimis safe harbor, which lets you deduct certain small costs if you elect it, and a routine maintenance safe harbor, which can allow a deduction for work that looks like an improvement but is routine. These rules have dollar limits and conditions, so use the current publication and your preparer. Do not guess.
What you can do is make the preparer's job easy. Ask vendors to list labor, parts and the exact work on the invoice. A line that says only "repairs" tells nobody anything.
Keeping it clean in the books
- Pick the property and the unit the work was done on.
- Code each line to a repair account or to a capital asset account.
- Keep the invoice, the work order and a before photo with the entry.
- For capital items, record the date placed in service, because depreciation starts then.
- At year end, give the preparer a list of items you were unsure about.
Publication 527 also advises keeping repair and improvement costs separate and keeping accurate records, since you need improvement costs when you sell or depreciate the property.
How DoorKeeping handles it
DoorKeeping reads vendor bills with AI, codes each line to a Schedule E expense account for the right property, and asks you to confirm lines it is unsure about. Expense accounts map to Schedule E lines for your preparer. DoorKeeping gives no tax advice, so use your preparer for repair or improvement questions.
Sources
Questions
- Is painting a rental a repair or an improvement?
- Repainting to maintain a unit is generally a repair. Check with your tax preparer for your situation.
- Is replacing a water heater a repair?
- Often it is treated as a replacement that is capitalized, but the rules have exceptions. Ask your preparer.
- What happens to an improvement cost?
- It is capitalized and depreciated over time rather than deducted all at once.
- What should I ask a vendor to write on the invoice?
- The exact work done, labor and parts on separate lines, and the property and unit.