Improvement or Repair?
This entry was posted on 5/29/2007 12:23 AM and is filed under uncategorized.
Work on buildings that you own are costs that may be either an improvement or a repair, and which of these categories they fit in can make a difference in your taxes. One definition of the difference between the two is that an improvement makes it better than what you had. New windows for instance, can be argued to be an improvement if they are more energy efficient than the original windows were when purchased. The same goes with furnaces. Most new furnaces are more efficient.
One case where the definition matters is when you sell your home for a gain that is more than the gain exclusion amount, which is currently $500,000 for the Married Filing Joint status, and 1/2 that for others. In that case, you want to have as many improvements as you can find to lower your tax bill. If you put a new roof on your house, that probably should be treated as a repair, and that would not reduce any gain you might have, unless you argued, that when you bought the house, the roof was in poor shape, leaking perhaps. It can be a subjective thing. Painting your house is probably not a repair, but adding no maintenance siding probably is, because you could say its lower maintenance is an improvement.
Whether a cost is a repair or an improvement is usually even more important when it comes to a 2nd home you may own, because there are no normal gain exclusion rules in place for that.
This issue also matters for buildings that are used commercially. In that case, you have a bias to call things repairs, in order to get a fast write-off versus the typical 27.5 and 39.5 year depreciation lives.
This IRS covers some of this in publication 523: http://www.irs.gov/pub/irs-pdf/p523.pdf on page 9, where it defines an improvement as adding value, prolonging its useful life, or adapts it to new uses. It also gives a list of typical improvements.
