A repair keeps a rental in ordinarily efficient operating condition and can be deducted; an improvement must be capitalized and depreciated. Under the tangible property regulations (Treas. Reg. § 1.263(a)-3) and IRS Pub 527, a cost is an improvement if it results in a betterment, restores the property, or adapts it to a new or different use. Three safe harbors, de minimis ($2,500 per invoice or item without an applicable financial statement), routine maintenance and small taxpayer, let some costs be deducted anyway.

The short version

  • Repairs, such as fixing a broken lock or painting a room, go on Schedule E line 14.
  • Improvements, such as adding substantial insulation or replacing an entire HVAC system, are capitalized and depreciated.
  • The improvement test looks at the building structure and each building system (plumbing, electrical, HVAC and others) separately.
  • The de minimis safe harbor is $2,500 per invoice or item without an applicable financial statement (AFS), elected each year by a statement with a timely filed return.
  • The routine maintenance safe harbor covers work you reasonably expect to do more than once in 10 years on a building.
  • The small taxpayer safe harbor applies to a building with an unadjusted basis of $1,000,000 or less, with an annual cap of the lesser of 2% of that basis or $10,000.

The three improvement tests

Pub 527: "You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use."

TestWhat it covers (Pub 527 and the IRS FAQ)
BettermentFixing a pre-existing defect or condition, enlarging or expanding the property, or increasing its capacity, strength or quality. The FAQ's example: expansion bolts added to a building in an earthquake-prone area increase the strength of the structure, so they are an improvement.
RestorationReplacing a substantial structural part, repairing damage after a casualty loss basis adjustment, rebuilding to a like-new condition, or returning property that has deteriorated to a state of disrepair to working condition.
AdaptationAltering the property to a use that isn't consistent with its intended ordinary use when you began renting it. The FAQ's non-example: painting walls and refinishing floors to prepare a building for sale is not adaptation.

Unit of property. For buildings, the tests apply to the building structure and to each key building system separately. The IRS FAQ lists the systems: plumbing, electrical, HVAC, elevator, escalator, fire protection and alarm, gas distribution, and security. So a cost is measured against, for example, the plumbing system, not the whole house.

No bright line. "Material" is not defined, and the FAQ says the percentages in the regulation's examples "are not intended to set a standard." Gray areas are common, which is why records and a preparer's judgment matter.

The three safe harbors

Safe harborWho and whatAmount or testHow it is used
De minimis (§ 1.263(a)-1(f))Items or invoices at or under the limit; not inventory or land$2,500 per invoice or item without an AFS; $5,000 with an AFSAnnual election: a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" attached to the timely filed original return, including extensions
Routine maintenance (§ 1.263(a)-3(i))Recurring work to keep property in ordinarily efficient operating conditionFor a building, reasonably expected more than once in the 10 years after it was placed in serviceAn accounting method, not a yearly election
Small taxpayer (§ 1.263(a)-3(h))Average annual gross receipts (including rents) of $10,000,000 or less for the three prior years; a building with unadjusted basis of $1,000,000 or lessTotal repairs, maintenance and improvements on the building for the year no more than the lesser of 2% of unadjusted basis or $10,000Annual election, building by building, by statement with the timely filed original return

De minimis details

  • The $2,500 figure applies to tax years beginning on or after January 1, 2016. The regulation text still says $500 "or other amount as identified in published guidance," and Notice 2015-82 raised it to $2,500.
  • You must have accounting procedures in place at the start of the year to expense such amounts, and treat them as expenses on your books.
  • Pub 527 says amounts deducted under this safe harbor may be deducted as rental expenses on Schedule E line 19.
  • An amount over the limit is not automatically capitalized. You apply the normal improvement tests to it.
  • The annual election is not a change in accounting method, so no Form 3115 is needed.

Routine maintenance details

The regulation describes "inspection, cleaning, and testing ... and the replacement of damaged or worn parts with comparable and commercially available replacement parts." It does not cover betterments, but it can cover certain restorations, including replacing a major component. Pub 527 says that even if a cost is an improvement, "you may still be able to deduct your cost under the routine maintenance safe harbor." Because it is a method of accounting rather than a yearly election, a tax professional handles any change to it, and whether it fits your rental is a question for your preparer.

Small taxpayer details

The dollar figures are fixed in the regulation and are not indexed for inflation, so the same $10,000,000, $1,000,000, 2% and $10,000 apply to 2025 and 2026. Amounts deducted under the de minimis and routine maintenance safe harbors count toward the annual cap. If the year's total for the building goes over the cap, the safe harbor is not available for that building that year.

Deciding step by step

  1. Describe the work. What was done, to which part of the property, and why.
  2. Identify the unit of property. The building structure or a specific building system.
  3. Check the de minimis safe harbor if you elect it for the year and the invoice or item is $2,500 or less.
  4. Apply the three tests. Betterment, restoration, adaptation. If none applies, it is a repair.
  5. If it is an improvement, ask whether the routine maintenance safe harbor applies.
  6. For a smaller building, check whether the small taxpayer election would cover the year's total.
  7. Record the result. Pub 527: "Separate the costs of repairs and improvements, and keep accurate records."

After you capitalize

A capitalized improvement is depreciated as a separate item, generally over the building's 27.5-year period for items like a new roof, starting when it is placed in service. See rental property depreciation. Shorter-lived items such as appliances or carpeting may qualify for federal bonus depreciation, though California does not allow it; see bonus depreciation and cost segregation.

Property tax works on a different test. Under R&TC 75.10, California reassesses completed new construction, not ordinary repair or maintenance, and only the new construction is added to the existing base value. Whether a project counts as new construction is a question for the county assessor. See California property tax on rental homes.

What to do next

  1. Keep every invoice with a short note of what was fixed and which system it was.
  2. Decide before the year starts whether you will use the de minimis election, and have accounting procedures in place at the start of the year to expense such amounts.
  3. Track each building's yearly total of repairs and improvements if you may use the small taxpayer election.
  4. Send your preparer a list of larger projects with photos and invoices.
  5. Ask your CPA whether any safe harbor elections should be attached to this year's return.

Good maintenance records also help with tenant turnover; see keeping rental records and handling maintenance requests. The move-in move-out checklist is a useful way to date the condition of each system.

Frequently asked questions

Is repainting a rental between tenants a repair?

Painting a room is one of the Schedule E instructions' own examples of a repair. The IRS FAQ also says painting walls and refinishing floors to prepare a building for sale is not adapting it to a new use. A larger project that bundles painting with other work can change the answer, so describe the whole project to your preparer.

Is replacing a worn-out component always an improvement?

Not necessarily. Replacing a substantial structural part is a restoration, but the IRS FAQ says the routine maintenance safe harbor can cover certain restorations, including replacing a major component, when the work is reasonably expected more than once in the 10 years after the building was placed in service. If the cost is $2,500 or less per invoice or item and you made the de minimis election, it may be deductible on that basis instead. Ask your preparer to apply the tests to your facts.

How do I make the de minimis election?

Attach a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to your timely filed original return, including extensions, with your name, address, taxpayer identification number and a statement that you are making the election. It must be made every year you want to use it, and you need accounting procedures in place at the start of the year.

Do the safe harbor amounts change each year?

No. The $2,500 de minimis amount (without an AFS) has applied since tax years beginning in 2016, and the small taxpayer figures of $10,000,000 in gross receipts, $1,000,000 of building basis and the lesser of 2% or $10,000 are fixed in the regulation and not indexed.

Does a big repair trigger a property tax reassessment?

Ordinary repair and maintenance does not. California reassesses completed new construction under R&TC 75.10, adding only the new construction to the existing base. If you are planning a major project, ask the county assessor how it will be treated.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Sources

Verified October 19, 2026.

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