Owning rental property can be a lucrative investment, not only because of rental income but also due to valuable tax deductions available to landlords. Among the most common questions posed by rental property owners are: Can I deduct home repairs? and How does depreciation work?
In this detailed guide, we’ll explore how the IRS treats repairs and improvements, how to calculate and claim depreciation, and how both impact your rental property tax return. Knowing the difference between deductible expenses and depreciable costs is crucial for maximizing tax benefits and staying compliant.
1. Rental Property Expenses: Repairs vs. Improvements
The IRS makes a clear distinction between repairs and improvements on rental property. Understanding this difference is essential:
- Repairs – These are ordinary and necessary expenses to keep the property in working condition. Examples include fixing a leaky faucet, repainting walls, patching a roof, or replacing a broken window. These expenses are fully deductible in the year incurred.
- Improvements – These add value to the property, prolong its life, or adapt it for a different use. Examples include adding a new roof, upgrading to hardwood floors, or remodeling a kitchen. These must be capitalized and depreciated over time.
2. Deducting Repair Expenses
To deduct repair expenses, the work must be:
- Directly related to your rental activity
- Not considered a capital improvement
- Reasonable in cost and scope
Common deductible repairs include:
- Fixing plumbing leaks
- Replacing broken locks or door handles
- Patching holes in walls
- Servicing the HVAC system
- Painting rooms between tenants
These costs should be reported on Schedule E (Form 1040) as rental expenses in the year paid.
3. Understanding Capital Improvements
If your work enhances the property, increases its value, or extends its life, the IRS considers it a capital improvement. These costs cannot be deducted immediately but must be added to the property’s cost basis and depreciated over time.
Examples of improvements include:
- New roof installation
- Replacing an entire HVAC system
- Modernizing a bathroom or kitchen
- Installing energy-efficient windows
- Building a new deck or garage
These improvements are typically depreciated over 27.5 years for residential rental property, using the Modified Accelerated Cost Recovery System (MACRS).
4. Depreciation: How It Works
Depreciation allows you to recover the cost of your rental property over time. It’s a non-cash deduction that can offset your rental income, thereby reducing your taxable income.
To depreciate a rental property, you must:
- Own the property (you must be the titleholder)
- Use it for income-producing activity
- Have a determinable useful life (i.e., it wears out)
- Expect it to last more than one year
What Can You Depreciate?
You can depreciate:
- The building structure (not the land)
- Capital improvements made to the property
- Certain appliances and furniture if used in rental activity
Land does not depreciate. When you purchase a rental property, you must allocate a portion of the cost to land (non-depreciable) and the rest to the building (depreciable).
5. How to Calculate Depreciation
Use the following steps to calculate depreciation:
- Determine the adjusted basis of the property (purchase price + capital improvements – land value)
- Allocate the basis between land and building (use county assessment or appraisal report)
- Apply the 27.5-year recovery period for residential rental property
- Use IRS depreciation tables (MACRS) or software to compute annual depreciation
For example, if you bought a rental property for $300,000 and land value is estimated at $60,000, then $240,000 is depreciable. Over 27.5 years, your annual straight-line depreciation is:
$240,000 ÷ 27.5 = $8,727.27 per year
6. How to Report Depreciation on Tax Return
Depreciation is claimed on Schedule E using Form 4562 (Depreciation and Amortization). This form helps calculate the amount of depreciation and tracks the recovery period of each asset.
Failing to claim depreciation, even if eligible, can hurt your tax position when you sell the property—since the IRS will still assume you claimed it and reduce your cost basis accordingly.
7. Safe Harbor for Small Taxpayers and De Minimis Safe Harbor
The IRS offers two safe harbor rules for landlords that simplify deducting repairs and improvements:
De Minimis Safe Harbor
You can deduct items costing less than $2,500 per invoice (or $5,000 if you have audited financials) without capitalizing them. This applies to tangible property such as appliances, flooring, or light fixtures.
Safe Harbor for Small Taxpayers (SHST)
Allows landlords with gross receipts under $10 million and properties with unadjusted basis under $1 million to deduct certain repairs, maintenance, and improvements without capitalizing.
8. Passive Activity Loss Limitations
Keep in mind that rental real estate income is generally considered passive income. Losses from depreciation or expenses may be limited depending on your income and level of participation. If your modified adjusted gross income (MAGI) is under $100,000, you may deduct up to $25,000 of passive losses per year if you actively manage the property.
9. Records You Should Keep
Maintain detailed records for all expenses, including:
- Receipts for repairs and maintenance
- Invoices for improvements
- Depreciation schedules
- Contracts with contractors or service providers
- Property purchase documents and settlement sheets
Good recordkeeping is essential if you’re ever audited or need to calculate capital gains upon sale.
10. Conclusion: Maximize Deductions, Minimize Errors
Yes, you can deduct home repairs and claim depreciation on your rental property—but it’s essential to distinguish between routine maintenance and capital improvements. Repairs are deductible immediately, while improvements must be depreciated over time.
Depreciation is one of the most powerful tools in a landlord’s tax toolbox, helping reduce taxable income without impacting cash flow. When used wisely—and in accordance with IRS rules—it can significantly improve your property’s profitability.
Consult a tax advisor if you’re unsure how to categorize a particular expense or calculate depreciation properly. A well-prepared Schedule E can mean thousands of dollars in tax savings every year.
