Routine Maintenance Safe Harbor Under IRS Repair Regulations

Repair versus improvement? Final IRS repair regulations provide business owners with safe harbors for current deductions.

Provided they are ordinary, necessary, and reasonable in amount, repairs to your rental property are operating expenses that are fully deductible in the year in which they are incurred. However, not all upkeep constitutes a repair for tax purposes. Some changes landlords make to their rental property are capital improvements. Unlike repairs, improvements to real property (rental buildings and building components) cannot be deducted in a single year. Instead, their cost must be depreciated over several years. Improvements to residential rental real property must be depreciated over an especially long period—27.5 years.

Unfortunately, telling the difference between a repair and an improvement isn’t always easy. The IRS adopted lengthy regulations in 2014 intended to help landlords make this distinction. These regulations include several “safe harbors” specifically designed to help landlords. One of these is the routine maintenance safe harbor. (IRS Reg. § 1.263(a)-3(i). ) Expenses that qualify as routine maintenance are automatically deductible in a single year, even if they would otherwise qualify as improvements that ordinarily must be depreciated over several years. However, there are some significant limits on when business owners (including residential landlords) can use this safe harbor.

What Is “Routine Maintenance”?

Routine maintenance consists of recurring work a building owner does to keep an entire building, or each system in a building, in ordinarily efficient operating condition. Under the IRS’s regulations, a building includes the building structure as a whole and nine separate systems.

Routine maintenance includes two activities:

  • inspection, cleaning, and testing of the building structure and/or each building system, and
  • replacement of damaged or worn parts with comparable and commercially available replacement parts.

Example: Howard buys an apartment building that contains an HVAC system that requires maintenance by an outside contractor every four years. This includes disassembly, cleaning, inspection, repair, replacement, reassembly, and testing of the HVAC system and many of its component parts. If inspection or testing discloses a problem with any component, the part is repaired, or if necessary, replaced with a comparable and commercially available replacement part. This expense—no matter how much--qualifies for the routine maintenance safe harbor and is currently deductible by Howard. No muss, no fuss, just deduct the entire amount.

However, there are two big limitations on routine maintenance: the ten-year rule, and the no betterments rule.

Ten-year rule

Routine maintenance can be performed and deducted under the safe harbor any time during the property’s useful life, including after it has been fully depreciated. However, building maintenance qualifies for the routine maintenance safe harbor only if, when you placed the building or building system into service, you reasonably expected to perform such maintenance more than once every ten years.

In determining whether you can reasonably expect to have to perform the maintenance more than once every ten years, you are supposed to take into consideration factors such as the recurring nature of the activity, industry practice, manufacturers’ recommendations, and your own experience with similar or identical property.

The more than once every 10 year requirement would seem to eliminate use of the routine maintenance safe harbor for building components that typically don’t need such frequent maintenance—for example roofs, windows, and wooden or tile flooring. However, repairs to such components may be currently deductible under the regular IRS repair regulations. For example, the regular repair regulations provide that installation of a new waterproof membrane (top layer) on a building’s roof to eliminate leaks through original (worn) membrane is a deductible repair.

No betterments or restorations

The routine maintenance safe harbor is intended for expenses property owners incur to keep their property in ordinarily efficient operating condition. Moreover, the maintenance must be attributable to the taxpayer’s use of the property, not that of a previous owner. Thus, the safe harbor does not apply to scheduled maintenance performed shortly after purchasing a building.

This safe harbor is not supposed to be used to currently deduct major remodeling or restoration projects. It specifically does not apply to expenses for betterments or restorations of buildings or other business property in a state of disrepair.

Thus, for example, you can’t use the routine maintenance safe harbor to currently deduct the cost of a building remodel or replacing an entire roof.

Routine Maintenance Safe Harbor for Personal Property

The routine maintenance safe harbor can be used for maintenance for personal property—that is, property other than buildings and building components. In this event, the safe harbor applies only if, when you placed the property into service, you reasonably expected to have to perform the maintenance more than once during the property’s class life--that is, during the recovery period prescribed by the IRS under the MACRS alternative depreciation system (ADS). The ADS class lives for most types of property used by landlords are shown in the following chart:

Asset

ADS Class Life

Office furniture, fixtures, and equipment (includes furniture and fixtures that are not a structural component of a building--for example, refrigerators, stoves, countertops, carpets, kitchen cabinets)

10 years

Computers and peripherals

5 years

Automobiles

5 years

Construction equipment

6 years

Thus, for example, maintenance for a computer would come within the routine maintenance safe harbor only if the taxpayer reasonably expected to have to perform such maintenance at least twice during the first five years after the asset was placed into service.

Example: Landlord Bob purchases a sit-down lawnmower with a five-year class life. Unfortunately, the mower turns out to be a lemon. During the first five years he owns it, he has to have its engine replaced twice. This expense was not something he could have reasonably expected to incur when he bought the mower. Thus, the expense does not qualify as currently deductible under the routine maintenance safe harbor.

Adopting the Routine Maintenance Safe Harbor

The routine maintenance safe harbor is not elective—that is, it is not claimed each year by filing an optional election with your tax return. Rather, the routine maintenance safe harbor is a method of accounting you adopt. Moreover, after you do so, you must use it every year. You adopt the routine maintenance safe harbor by currently deducting expenses that come within it on your books and on your tax return. If you don’t want to use this safe harbor, don’t adopt it. Its use is completely voluntary.

Alternatives to Routine Maintenance Safe Harbor

As a result of the Tax Cuts and Jobs Act that went into effect in 2018, the cost of personal property items used in a rental activity can also be deducted in a single year using 100% bonus depreciation (in effect through 2025) or the Section 179 deduction. These methods can be used instead of the routine maintenance safe harbor. Nevertheless, it is often preferable to use the safe harbor. When you use the safe harbor, you get to deduct the full amount as a business operating expense the year it is incurred and there will be no tax impact when you later sell the property. In contrast, when you deduct an expense through bonus depreciation or Section 179 expensing the deduction can result in extra tax when you sell the property. If you sell real property at a profit, you must pay tax at a rate up to 25% on your total regular depreciation deductions. If separately deducted personal property is involved, you pay tax on your regular or bonus depreciation or Section 179 deductions at your ordinary income tax rates (as much as 37%). This is called recapture, since deductions you previously took are recaptured into your income and taxed.

There is another alternative to the routine maintenance safe harbor: The de minimis safe harbor can be used to deduct in one year the cost of personal property and building components used in a rental activity. However, for most landlords this safe harbor is limited to items that cost no more than $2,500 a piece. There is no dollar limit on the routine maintenance safe harbor.

Talk to a Tax Attorney

Need a lawyer? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
NEED PROFESSIONAL HELP ?

Talk to a Tax attorney.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you