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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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What can be catagorized as a tax deductable capital improvement

Customer Question

What can be catagorized as a tax deductable capital improvement? How does the IRS define a repair vs. a replacement? My husband submitted expenses to his CFO and they are defining them as a repair when he feels they are a much needed remodel. This included sheetrock replacement, tape, bed, texture, and paint, as well as exterior wood replacement.
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

There is no strict definition what is considered capital improvements and what repairs.

 

IRS determines Improvements as those that add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property.

 

The following chart lists some other examples of improvements.

Additions
Bedroom
Bathroom
Deck
Garage
Porch
Patio
Heating & Air Conditioning
Heating system
Central air conditioning
Furnace
Duct work
Central humidifier
Filtration system
Lawn & Grounds
Landscaping
Driveway
Walkway
Fence
Retaining wall
Sprinkler system
Swimming pool

Miscellaneous
Storm windows, doors
New roof
Central vacuum
Wiring upgrades
Satellite dish
Security system

Plumbing
Septic system
Water heater
Soft water system
Filtration system

Interior
Improvements
Built-in appliances
Kitchen modernization
Flooring
Wall-to-wall carpeting

Insulation
Attic
Walls
Floors
Pipes and duct work

 

 

According to the IRS repairs maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property.

Examples. Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.

Exception. The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition.

 

Please see for reference IRS publication 523 page 9-10 - http://www.irs.gov/pub/irs-pdf/p523.pdf

 

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22653
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you
Customer: replied 5 years ago.

 

This is a business building. Actually it involved black mold inside the building and wood rotted on the outside of the building. Do the same guidelines apply for businesses that apply to homes? This action had to be taken to continue to inhabit the building. They had to be done to "prolong the life of the facility." Would this be considered capital improvement?

Customer: replied 5 years ago.
Also, the reason for the black mold was because a couple of years ago the roof leaked and the entire roof had to be replaced. My husband was unaware the interior was so damaged at the time. Then black mold appeared. Would this not be considered capital improvement?
Expert:  Lev replied 5 years ago.

Yes - capital improvements vs repairs classification would be the same for business or for personal properties. Following are definitions:

 

Improvements add to the value to the property, prolong its useful life, or adapt it to new uses.

Repairs maintain the property in good condition but do not add to its value or prolong its life.

 

You may disagree with the IRS agent in interpretation of the specific expenses - and sometimes they may be viewed either way....

 

The IRS recently concluded that the cost of mold removal and remediation is treated as an ordinary and necessary business expense and deductible in the year paid.
The removal of mold is necessary because the health of the people in the building will be affected and mold remediation does not add value to the property.

However if the mold remediation is the part of a renovation plan that includes the entire property - the entire cost should be capitalized.

 

According to IRS Private Letter RulingNNN-NN-NNNN- http://www.irs.gov/pub/irs-wd/0607003.pdf

the tax treatment of the cost that increases the useful life of a building, add value to it or adapt it to a different use must be capitalized and depreciated over the applicable period prescribed by the Internal Revenue Code.

In PLRNNN-NN-NNNN the IRS determined that the cost of mold removal did none of these things; it merely kept the building serviceable - so the IRS permitted the cost to be deducted in the year incurred by the taxpayer. The ruling did state that it was presumed that none of the mold had been present at the time the taxpayer purchased the property - assuming otherwise - the mold remediation may have been treated as a part of the purchase cost.

Please be aware that

  • the IRS Private Letter Ruling covers only specific situation and specific taxpayer and may not be applied to all other situation (but as a practical matter it serve as an example - not as a law)
  • in this specific situation the cost of mold removal should be deducted on the schedule C (for property used in business) or schedule E (for rental property)
  • this would not apply to the costs of mold removal in your home, which is a personal use property with respect to which maintenance costs are not deductible for income tax purposes.
  • you may be able to treat the cost of mold removal for personal use property as causality loss - but that issue is not addressed in this PLR and should be discussed with your tax preparer.

 

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