Vacation rental repairs vs. improvements

Without repairs, your vacation rental would show signs of wear, things would break (and stay broken), and guests would likely start leaving bad reviews. If you forgo upgrading your vacation rental and making improvements, you would find it harder to compete with more updated vacation properties—both for bookings and resale value.

While both repairs and improvements are crucial to your success, it’s a common mistake to mix up these two types of expenses on your taxes—but make sure you don’t. The IRS treats repairs and improvements differently. Misclassifying one for the other can lead to an expensive audit and end up costing you even more.

In this post, we’ll break down what constitutes a repair and an improvement, look at examples of each, and show you how you might be able to write off both on your taxes.

*The IRS rules about depreciation and write-offs can be complicated depending on your situation. We recommend working with your tax professional to decide the best way to deal with big expenses based on your specific circumstances.

How do you distinguish between vacation rental repairs and improvements?

Telling the difference between a repair and maintenance can be complex at times. Depending on what work you have done at your vacation home, it can get confusing fast. Let’s try and clear things up. In short:

• A repair generally fixes something—say a broken refrigerator, garage door, or faucet—and brings it back to its original working condition.
• An improvement generally involves extensive work and costs to better the property and increase its property value.

A good question to ask yourself: Did you make your vacation rental better (likely an improvement) or merely restore something to working condition (likely a repair)?

What is a repair?

As stated above, a repair fixes something and brings it back to the condition it was in before the damage. It doesn’t significantly improve the item nor add value to the vacation rental.

What if something is beyond repair and you have no choice but to replace it completely? Say, buying a new coffeemaker or pipe to replace a broken one. That’s where things can get tricky. Some replaced items may be considered improvements and others are seen as repairs. (This is where it helps to work with a tax professional to work out these distinctions for you).

How to deduct vacation rental repairs from your taxes

Your vacation rental repairs are generally simple to write off. That’s because you can most often deduct 100% of the repair costs in the year the repair was completed.

Let’s say you fixed (not replaced) your roof that was damaged by a storm and the costs totaled $6,000. You can typically write off that entire expense in the current year, since it generally qualifies as a repair. That roof repair can lower your taxable income by $6,000.

What is a vacation rental improvement?

Improvements made to your vacation rental are usually more extensive—and more expensive— than repairs. Unlike repairs, improvements are not short-term fixes. They generally add significant value to your vacation rental for years to come.

According to IRS rules, your vacation rental is improved if the work:

• Betters your property
• Adapts your property for a new or different use
• Restores your property
  

How do you deduct improvements from your taxes?

Unlike repairs, improvements generally can’t be written off on your taxes all at once. Instead, the IRS requires you to depreciate your vacation rental improvements over time—typically, the number of years the item or the improvement is expected to be useful.

Your best resource to determine how long your improvement needs to be depreciated is the IRS Publication 527. For example, new flooring generally has a depreciation schedule of 5 years. Meanwhile, structural improvements such as installing a new furnace typically have a depreciation schedule of 27.5 years.

Safe Harbor Rules for Small Taxpayers

Wish it were simpler to write off these expenses come tax time? Depending on your vacation property, it could be. The IRS offers an option that may allow you to deduct all expenses for both repairs and improvements in the same year, on the same form—simplifying your tax filing.

With the IRS’ Safe Harbor for Small Taxpayers (SHST), you can deduct expenses for vacation rental improvements and repairs. You must meet eligibility criteria, including income, expense, and size limits, though.

• Unadjusted property basis cannot exceed $1 million
• Annual expenses for repairs and maintenance cannot exceed the lesser of $10,000 or 2% of the building’s unadjusted basis
• Your annual gross income from your vacation rental must be less than $10 million for the three preceding tax years

One thing to note: There is no official IRS form for the SHST election. You can create a simple document yourself (preferably with the help of a tax advisor) that tells the IRS you are using the safe harbor election and attach it to your return.