Repairs versus improvements on a rental turnover, and the records your CPA needs

Scope of this guide

We are a contractor, not tax advisors. This guide explains how project scope, timing and paperwork affect what you can discuss with your tax professional. It is not tax, legal or accounting advice. Tax rules change and depend on your situation. Before you make decisions, consult a CPA, such as Copper River Tax (copperrivertax.com). Outstanding Construction does not prepare tax returns and is not responsible for any tax position you take.

The rules described here were checked against IRS and New York State guidance in October 2026.

Why the classification matters

A repair that is deductible can generally be expensed in the year it is paid. An improvement is capitalized: it is added to the property's basis and recovered through depreciation, which for a residential rental building and its structural improvements generally runs over 27.5 years. Appliances, carpeting and certain other items have shorter recovery periods. The difference affects your taxable income this year, your depreciation schedule and your gain when the building is eventually sold.

IRS Publication 527 advises rental owners to separate the costs of repairs and improvements and to keep accurate records. That separation starts with the estimate and the invoice, which is where the contractor's work and the CPA's work meet.

The tests your CPA will apply

Under the federal tangible property regulations, the analysis is not applied to the building as a whole. It is applied to the building structure and to each key building system separately: plumbing, electrical, HVAC, elevators, escalators, fire protection and alarm, gas distribution and security. A cost must generally be capitalized if it does any of the following to the structure or to one of those systems.

• Betterment: it fixes a defect that existed before you acquired the property, enlarges or expands it, or materially increases its capacity, strength or quality. Upgrading a 100-amp electrical service to 200 amps is a common example of increased capacity.
• Restoration: it replaces a major component or a substantial structural part, or rebuilds the property after damage. Replacing all of the supply and drain piping serving a bathroom raises this question even when the new piping is like for like.
• Adaptation: it converts the property to a new or different use, such as finishing a basement storage area as living space or converting a ground-floor store to an apartment.

Timing matters. Work performed shortly after you purchase a building, to correct conditions that existed at purchase, is often treated as a betterment even if the same work would be a repair years later. Tell your CPA when you bought the property and what condition it was in.

Common turnover items

IRS Publication 523 gives a similar example for homeowners: replacing broken windowpanes is a repair, but replacing the same window as part of a project that replaces all of the windows counts as an improvement.

Safe harbors to discuss with your CPA

The regulations include three elections that can allow certain costs to be deducted. Each has conditions, and each must be elected by the owner, usually through a statement attached to the tax return. Your CPA decides whether they apply.

• De minimis safe harbor: amounts of $2,500 or less per invoice or per item, as substantiated by the invoice, or $5,000 for taxpayers with an applicable financial statement. Dividing one job into several invoices to stay under the threshold does not change the analysis, so our invoices reflect the work as it was actually performed and priced.
• Routine maintenance safe harbor: recurring work that keeps a building structure or system in ordinarily efficient operating condition and that you reasonably expect to perform more than once in the 10 years after it was placed in service. It does not cover betterments.
• Small taxpayer safe harbor: for owners with average annual gross receipts of $10 million or less and a building with an unadjusted basis of $1 million or less, when total repairs, maintenance and improvements on that building for the year do not exceed the lesser of $10,000 or 2% of its unadjusted basis.

Mixed-use and commercial space

Small mixed-use buildings are common in our service area, and the commercial portion follows different rules. Interior, non-structural improvements to nonresidential space may be qualified improvement property with a 15-year recovery period. Federal law restored 100% bonus depreciation for qualified property acquired after January 19, 2025, and IRS Notice 2026-11 provides interim guidance. Section 179 can apply to certain nonresidential roofs, HVAC, fire protection, alarm and security systems, but property used for residential rental is generally excluded. Ask your CPA how these rules apply to each part of your building.

Cost segregation studies are often presented as a way to accelerate depreciation on rental buildings. Copper River Tax has published an article explaining the passive loss rules and other limits that often reduce the expected benefit. We do not perform cost segregation studies.

What to request on a turnover invoice

• Separate lines by unit, room and building system, rather than a single lump sum for the turnover
• Materials and labor shown separately where practical
• Make, model and serial number for each appliance and piece of equipment
• DOB permit and job numbers, inspection dates and sign-offs for permitted work
• The date each item was completed and ready for use
• Before and after photos, and the cause of any damage that was repaired

Paperwork notes for 2026

Form 1099-NEC: the IRS instructions for 2026 raise the reporting threshold for nonemployee compensation to $2,000, with inflation adjustments beginning in 2027. Reporting applies to payments made in the course of a trade or business; personal payments are not reportable, payments to corporations are generally excluded, and card payments are reported by the payment processor on Form 1099-K. Whether your rental activity requires you to file is a question for your CPA. We provide a completed Form W-9 on request.

New York sales tax uses its own definition of a capital improvement, which differs from the federal income tax tests. Under Tax Bulletin TB-ST-104, qualifying capital improvement work is not subject to sales tax, and the owner gives the contractor Form ST-124, Certificate of Capital Improvement. Repair and maintenance work, such as fixing a broken step or painting existing cabinets, is taxable. For rent-stabilized apartments, DHCR applies separate documentation rules to major capital and individual apartment improvements, and the same itemized records are useful there as well.

We prepare itemized turnover estimates and invoices organized by unit, room and building system, with permits and photos attached, so that your CPA has a clear record of what was done and when. We describe the work as it was performed and do not structure invoices for a tax result. For tax questions, consult a CPA such as Copper River Tax.