Techniques to report Capital Improvements as Repairs

[Mike D.]

I will be closing on a 4 plex apartment building this month. Each unit in the building needs new windows and could use some updates to the kitchen and needs new carpet. IRS rules require that repairs, when done as part of a capital improvement project must be amortized over their useful lives instead of being expensed the current year.

Are there ways to piece-meal the improvements and report them as repairs? For example replace the refrigerator while the tenant is still there.

Where does the IRS draw the line between an overall improvement of the unit, and miscellaneous repairs from a previous tenant?

[Bill Walston]

The age old question of capital expenditure vs. repair and maintenance ... and it IS sometimes a very grey area.

First, don't make the mistake of letting dollar signs be the deciding factor when trying to make the determination between the two. YOu can spend a few hunded bucks on a capital expenditure and thousands of bucks on a repair/maintenance. The classification is based on the facts and circumstances of the nature of the expenditure.

According to IRS PUB 527:

And continues with

As you noted, even items that would usually be treated as repairs and maintenance are treated as an improvement if incurred while "getting the property ready for use." That being said, I don't think that is the case in this situation. It sounds as though the property is already in use as a rental property. Your expenditures will be classifed as either R&M or a capital improvement. You just need to determine which, based on the above. Those "definiations" apply whether the work is done "piece-meal" or all at once.

By the way, if you replace the refrigerator, the expenditure is a capital expenditure, whether or not the unit is occupied at the time. You're putting in a 'new" asset. If, on the other hand, you simply replace parts on the existing refrigerator it would be a R&M.

Frustrating, huh? :)