L/O repair expenses-when to deduct

I purchased two single family homes last year and have them both rented out on L/O. I did some repairs on both of them before I put the tenants in and I am trying to decide if I should deduct the repair expenses now or wait till I eventually sell these properties to offset the capital gain tax. My understanding is that vast majority of L/O does not get exercised and so it might take many years for me to actually sell. I was wondering what do you seasoned investors do in this situation. Thanks so much for your opinions!

Hi Houseman…

You need to define the work that you accomplished as either “repair” (Repairs. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs) or “improvement” (Improvements. An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses).

These definitions are from the IRS. Accordingly, repairs are deducted in the tax year that they are accomplished. Improvements, in that they “add to the value of the property”, are capital expenditures and can be used to reduce your capital gains or by depreciating them.

You CANNOT use “repairs” to reduce capital gains…at least not legally. :wink:

More information can be found at:


Hope this helps.


Hi Keith,
Your response was very helpful, I have a better idea now what to do.


Good luck…taxes can be such a pain!



kdhastedt gave you good advice about the difference between a repair and a capital improvement. However, one more step is needed in the process before you can determine whether a repair expense is deductible.

When was the property put on the market as available for rent? Repair expenses are only deductible on Schedule E after the property is “put in service”.

There is quite a bit of grey between the terms “repair” and “improvement”. Because repairs are deductible now and offset ordinary income (which is normally taxed at higher rates than long-term capital gains), most investors tend to define house related fix up costs as repairs (instead of improvements) whenever rationally possible. Everyone’s situation is different - some investors have cause to defer expenses, but most are better served by taking an immediate deduction against ordinary income, as opposed to deferring & reducing the lower long-term capital gains taxes.

John Hyre

Hi everybody,
Both houses were rented out in 04, one in September the other one in October. My plan is to classify the majority/all of the work I did as repairs and deduct now. I wanted to get and idea about this because I am new to REI but I will let somebody with more experience prepare my tax return this year.
Thanks again for your input!!