When is a Home Improvement Now a Repair?

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Family child care providers can now deduct many items as house repairs rather than home improvements, according to a recent IRS regulation (Treasury Regulation Section 1.263).

The difference is significant. A repair can be deducted in one year while a home improvement must be depreciated over 39 years.

Repairs deal with normal wear and tear and routine maintenance. Repairs are expenses that don’t materially add to the value of the home or prolong its life; they simply keep it in good operating condition. Examples of repairs include: painting, wallpapering, fixing broken glass or frozen pipes, rug cleaning, deck staining, tree removal and so on.

The new regulation has expanded the definition of what you can include as a repair. Now, under certain circumstances, the following could be considered as repairs: insulation, new windows or doors, new wood/tile floors, remodeling of a basement.

This is terrific news for family child care providers!

The new definition of a home improvement is something that results in the “betterment to the unit of property.” When you replace a major component or substantial structural part of a unit of your home you must depreciate it as a home improvement.

What does this mean? Look at your home as made up of a number of structural components or units: roof, walls, windows, floors, doors, plumbing, electrical, and heating/air conditioning. If you replace a substantial portion of any of these it would be considered a home improvement.

What is a “substantial portion”? 10%? 20%? 49%? I talked with the IRS official who wrote the regulations but she wouldn’t be pinned down on a specific percentage. She did agree that replacing 10 or 20% of the windows or doors would be considered a repair. She also said that installing a wood or tile floor in one room would be a repair. But, she wouldn’t say yes or no to remodeling one of three bathrooms.

A home improvement is something that results in the betterment of the property, restores the property, or adapts the property to a new or different use. If you replace a significant or substantial portion of a major component of your home (walls, plumbing, electrical, heating, and so on), you must depreciate such items over 39 years.

The following items remain home improvements because they are separate components of your home and you likely have only one of them: replacing your furnace, adding a new deck or garage, and remodeling your kitchen.

Under some circumstances you would have to treat what would otherwise be a repair as a home improvement. For example, if you replaced the towel racks or sink in your bathroom, this would be a repair. But if you replaced them as part of a larger remodeling of your bathroom they must be treated as an improvement.

Other

This new regulation applies to items purchased in 2014 and subsequent years. So, if you depreciated your egress window or tile floor in your kitchen as a home improvement on your 2014 tax return, you can amend your return and get a refund by treating it as a repair.

If the item you are treating as a repair is used 100% for your business (egress window, new flooring in an exclusive use room, basement used only by the day care children, etc.) you can deduct 100% of the cost in one year. If the item is used by your family and your business, use your Time-Space Percentage. If your business use is much higher than your Time-Space Percentage, you can calculate an actual business use percent.

This new clarification of what is a repair and what is a home improvement is complicated, and I advise you to consult with your tax professional before applying the rule to your situation.

My article “What is a Home Improvement?” describes what the rules were before this new regulation.

Also, this regulation allows providers to deduct some home improvements in one year if they meet a special test. See my article “When Can Your Home/Land Improvements Be Deducted in One Year?”

Tom Copeland – www.tomcopelandblog.com

Image credit: https://www.flickr.com/photos/ntmprojects/


Categories: Depreciation and Home, Record Keeping & Taxes

15 replies

  1. Hi Tom- Over the weekend, we had a leak in a bathroom that is shared with my child care. We had to replace toilet, vanity, and flooring so that my business open on Monday. How do I categorize this on my taxes?

  2. Hi Tom,
    I had to put a fence around my pool so that my daycare could pass inspection. The cost was $1500 and I put it on a credit card. First is the gate 100% deductible and Second do I have to claim the entire amount this year or can I claim part of it next year?

  3. we had a to replace a ac/heating unit now interest and all is 30 grand this was done in jan2016 so how do a deduction on this and how is this done if it is 39 years bc I wont be a provider in 39 years.

    • This is a home improvement that must be depreciated over 39 years. If you don’t stay in business for that long, you will only get the depreciation deduction as long as you are in business. Multiply the cost by your time-space % and divide by 39 to get your yearly deduction. You can also deduct the time-space % of the interest you pay each year.

  4. Question 1:
    We had to repair or a/c unit and they had to replace parts of it (like coils, etc). Would this be a repair or an improvement?

    Question 2:
    This year we are going to replace the a/unit unit because it’s still not working right. I’ll be paying the cost up front instead of financing it. Would this be a repair or an improvement?

  5. Hi Tom, thank you so much for your wealth of information here!!

    I run a small home child care. In 2016, we had to have gutter work done. Apparently when our home’s roof was redone by the previous owners, there was no drip edge installed. Due to this, the fascia board behind the gutters began to rot and eventually, the gutters began sagging and twisting away from the house. We had to replace the fascia board as well as all of the gutters. The cost was $800. Would you consider this work a repair or an improvement? Thank you for your time!

  6. HI Tom,

    I had a new CPA last year who did not think the 2500 deductions applied for the home improvements for 2015. so he depreciated some that I made.

    He informed me that they apply for 2016.

    So my question is… if something is already in depreciation (home improvements for 2015) can they be taken out of the depreciation list and deducted fully for 2016?

    Thanks.

  7. The $2500 rule was introduced for the 2016 tax season. However, the rule also said that if a taxpayer used this rule for 2015 and was audited, the IRS would not challenge it. In other words, you can use it for 2015. In your situation, you could amend your 2015 tax return and claim the entire business deduction.

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