Is Landscaping a Capital Improvement According to the IRS?

The Internal Revenue Service (IRS) provides specific guidelines to differentiate between immediate expenses and long-term investments. This distinction affects how property owners account for these costs for tax purposes. This article clarifies the IRS’s rules, focusing on how landscaping expenses are classified and their tax impact.

Defining Capital Improvements for Tax Purposes

The IRS defines a capital improvement as an expense that adds value to a property, prolongs its useful life, or adapts it to new uses. These criteria are often summarized as “betterment, adaptation, or restoration” (BAR). A betterment increases the property’s value, makes it more useful, or improves its quality, such as adding a new room to a house.

An adaptation changes the property’s use, such as converting a residential home into a business office. A restoration returns a property to its original condition after it has fallen into disrepair, like replacing an entire roof. These types of expenses are added to the property’s cost basis. This differs from routine repairs and maintenance, which are generally deductible in the year they are incurred for business properties.

Routine repairs are activities that keep property in its ordinarily efficient operating condition without adding significant value or extending its life. Examples include fixing a leaky faucet, repainting walls, or replacing a few broken window panes.

Landscaping as a Capital Improvement

Landscaping expenses can be considered capital improvements if they meet the IRS criteria for betterment, adaptation, or restoration. For instance, installing a new, permanent irrigation system, constructing a retaining wall, or undertaking significant re-grading of land can be capital improvements. Planting large, mature trees or permanent shrubs as part of a major design overhaul, or installing a permanent driveway or patio, also often fall into this category.

Conversely, many common landscaping activities are not considered capital improvements but rather routine maintenance or repairs. These include regular tasks that maintain the property’s current condition without adding significant value or extending its useful life. Examples are mowing the lawn, weeding, seasonal flower planting, replacing dead annuals, or minor pruning.

The classification of landscaping expenses also depends on the type of property. For personal residences, qualifying landscaping improvements add to the home’s cost basis. For business properties, such as rental properties or commercial spaces, qualifying landscaping may be depreciated over time.

Tax Treatment and Documentation

For personal residences, capital improvements, including qualifying landscaping, increase the home’s cost basis. This increase does not result in an immediate tax deduction. Instead, it reduces any taxable gain when the home is eventually sold. For example, if a homeowner buys a house for $300,000 and later spends $50,000 on qualifying capital improvements, the cost basis increases to $350,000. When the home is sold, the profit is calculated by subtracting this adjusted cost basis from the sale price, potentially reducing the amount subject to capital gains tax.

For business properties, capital improvements are generally depreciated over their useful life, allowing the cost to be recovered through deductions over several years. While land itself cannot be depreciated, certain land preparation costs, including some landscaping for business use, can be depreciated if they are closely associated with depreciable property and have a determinable useful life. The IRS allows commercial properties to depreciate qualifying landscaping costs over 15 years under the Modified Accelerated Cost Recovery System (MACRS).

Maintaining detailed records for any landscaping costs classified as capital improvements is important. This documentation should include invoices, receipts, contracts, proof of payment, and clear descriptions of the work performed. These records are necessary to substantiate the expense to the IRS, accurately calculate the property’s basis for sale, or support depreciation deductions for business properties.