Bringing Up to Code and Safety - Repair or Improvement?

[Shimi T.]

Hello BP members, I'm a 'Buy and Hold' RE investor with several rental properties in Las Vegas and Southern California. 

In 2020, I bought my last SFR rental property in SoCal. As part of repairing the place for tenants, I replaced a broken-down/inoperable heating system from the 40s. Only necessary replacement work was performed like the heater replacement while the existing ducts (and such) were only cleaned and restored. The system became OPERATIONAL and BROUGHT UP TO CODE per the CA regulations. Total cost was around $10K.

It should be emphasized that the property was placed in service (e.g. published, tenant search, showings, applications reviews, etc.) before doing the repairs. Also, the heating system was not necessary for renting the place during the warm Southern CA spring. 

Here is my question: Is this system replacement can be claimed as a repair, or it falls under a home improvement (depreciation)?  

I would appreciate your input!  Thank you in advance. 

[Eamonn McElroy]

From a bird's eye view:

If you elect the de minimis safe harbor, capitalize.

If you forgo the DMSH and apply the BAR tests, capitalize.

Probably take a partial asset disposition on the old heating system.  Probably won't be a lot based on the description.

The latter is advanced tax strategy.  Your tax professional should be able to assist you with all of the above.