A one-page decision tree for distinguishing a $400 deductible repair from a $4,000 capitalized improvement. Print it. Put it on your fridge.
The repair-vs-improvement question comes up every time you spend money on your home. It matters for two reasons: repairs are currently deductible on rental properties; improvements are not (they are depreciated or added to basis). Getting this wrong — in either direction — affects your taxes.
The IRS framework is called the Tangible Property Regulations. It is long. This is the useful summary.
The BAR test
An expenditure is a capital improvement if it results in a Betterment, Adaptation, or Restoration of the property (or a major system within it). Everything else is a repair.
Betterment
The work materially adds value to the property, fixes a pre-existing defect discovered at acquisition, or adds to the property's capacity, strength, or quality. Examples: adding a room, finishing a basement, upgrading to a higher-capacity HVAC system.
Adaptation
The work adapts the unit of property to a new or different use. Converting a garage to living space. Modifying a single-family home to accommodate a home office with separate entry.
Restoration
The work restores a component to working condition after it has reached the end of its useful life, fixes damage from casualty, replaces a major component, or rebuilds the property to like-new condition. Examples: full roof replacement, replacing a dead HVAC compressor, re-siding after storm damage.
The flowchart
- Does the work add a new component that did not exist? → Improvement.
- Does it restore a component that wore out or failed completely? → Improvement.
- Does it adapt the space to a substantially different use? → Improvement.
- Does it fix something that was broken or degraded, without replacing the whole thing? → Repair.
- Is it routine upkeep with no change to the property's condition or function? → Repair.
Clear examples on each side
Improvements (capitalize or add to basis)
- Full roof replacement → Restoration
- New HVAC system replacing a failed unit → Restoration
- Kitchen remodel → Betterment
- Bathroom addition → Betterment
- New hardwood floors replacing carpet → Betterment
- Solar panel installation → Betterment
- Converting an attic to a bedroom → Adaptation
Repairs (deductible in year incurred for rentals)
- Replacing two shingles damaged in a storm
- Patching a drywall hole
- Repairing a leaking pipe (not replacing the entire plumbing run)
- Painting, interior or exterior
- Replacing a broken window pane
- Servicing the HVAC (tune-up, refrigerant recharge)
- Fixing a stuck door or window
The gray area
Where it gets genuinely unclear: replacing one appliance (usually a repair) versus replacing all appliances as part of a kitchen remodel (usually an improvement). Replacing part of a roof (gray) versus the entire roof (improvement). The IRS has a de minimis safe harbor — expenses under $2,500 per item can be expensed rather than capitalized — which resolves many small-dollar questions in favor of the repair treatment.
When in doubt: document the expense either way, note your reasoning, and let your accountant make the final call. A documented judgment is defensible. An undocumented one is not.
