Capital Improvements vs. Repairs
Treasury Regulation §1.263(a)-3 decides whether an amount paid for a building is a deductible repair or a capital improvement. The test is applied to the building structure and to each building system. Older cases, including Plainfield-Union, are background only. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Amounts paid to improve a unit of property must be capitalized under Treas. Reg. §1.263(a)-3.
- An improvement is a betterment, a restoration, or an adaptation to a new or different use.
- For buildings, the unit of property is the structure plus each listed building system, tested separately.
- Routine-maintenance and de minimis safe harbors can allow current deductions when their tests are met.
- Plainfield-Union is a pre-regulation test. The IRS nonacquiesced. The regulation controls current filings.
Treasury Regulation §1.263(a)-3 requires capitalization of amounts paid to improve a unit of property. An improvement is a betterment, a restoration, or an adaptation of the unit of property to a new or different use. That regulation is the current rule. Lead with it. Cases decided before 2013 are background.
For a building, the unit of property is the building structure and each building system: HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm, security, and gas distribution. Work that restores the HVAC system can be a capital improvement even if the same dollar amount would have been a repair if tested against the entire building. Lessees apply the analysis to the leased portion of the structure and of each system.
A betterment includes fixing a material pre-existing defect, a material addition or increase in capacity, or amounts reasonably expected to materially increase productivity, efficiency, strength, quality, or output. A restoration includes replacing a major component or substantial structural part, replacing a component for which a loss was taken, restoring after a casualty to the extent of the basis adjustment, and returning property from a nonfunctional state. An adaptation is a use inconsistent with the ordinary use when the taxpayer placed the property in service.
Routine maintenance safe harbors and de minimis expensing rules can allow current deductions for some costs. The de minimis safe harbor in Treas. Reg. §1.263(a)-1(f), as applied through Notice 2015-82 and the IRS tangible-property page, has a $5,000 per-invoice ceiling for taxpayers with an applicable financial statement and a $2,500 ceiling without one, for tax years beginning on or after January 1, 2016. Those elections are optional and have their own statements.
This page is educational information, not tax advice. “Material” is not defined. The IRS says percentage examples in the regulations are not standards. Repair-versus-improvement decisions should be reviewed by the taxpayer’s CPA.
How to apply the building-system test
Identify the unit: the structure or a listed system. Then ask whether the expenditure is a betterment, restoration, or adaptation of that unit. Replacing one of four elevators can be a restoration of the elevator system. Painting a hallway often is not a betterment of the structure.
A cost segregation study can change later units of property. If components are reclassified into a different MACRS class, the subsequent-change rule in the tangible-property regulations requires the unit determination to follow that classification. Future repairs are then tested against the new unit.
Section 263A still capitalizes the direct and allocable indirect costs of producing property, including constructing an improvement. A repair label does not override those production rules when they apply.
Older cases
Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333 (1962), compared the asset after the work with its condition before the condition that made the work necessary. Estate of Walling, as reversed by the Third Circuit, is cited for a put-versus-keep distinction. Both predate the 2013 regulations.
The IRS nonacquiesced in Plainfield-Union. The case is historical background. It is not the test to apply on a current return. The regulations control current filings.
INDOPCO, Lincoln Savings, and Idaho Power are capitalization landmarks of a broader kind. They do not supply the building-system list. Use them, if at all, as general capitalization context, not as a substitute for §1.263(a)-3.
Partial dispositions and replacements
When a component is replaced and the taxpayer elects a partial disposition under Treas. Reg. §1.168(i)-8(d), the remaining basis of the retired portion can be recognized and depreciation on that portion stops. The cost of the new component is then capitalized as a separate asset or as an improvement, depending on the facts.
If the taxpayer deducted the replacement as a repair and an examiner later capitalizes it, a limited path exists to make a late partial-disposition election for the portion the adjustment addresses. That path is in the disposition regulation, not in Plainfield-Union.
See the partial-disposition page for election timing. Do not assume every roof replacement automatically produces a loss. Without the election, the old roof’s basis often stays in the building.
Safe harbors in brief
Routine maintenance for buildings must be expected to occur more than once during the 10-year period beginning when the structure or system is placed in service. A one-time replacement of a major component is not routine maintenance.
The small-taxpayer safe harbor (average annual gross receipts of $10 million or less; building unadjusted basis of $1 million or less; annual spend not over the lesser of 2 percent of that basis or $10,000) can allow a current deduction for mixed repair and improvement spend on that building. It is an annual election.
Amounts that exceed a de minimis ceiling are not automatically capital. They return to the general betterment, restoration, and adaptation analysis, or to materials-and-supplies treatment if they qualify.
Sources
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