From apartment buildings and condominiums to single-family rental homes, more property owners are recognizing the long-term value of investing in real estate. One of the biggest financial benefits of owning a rental property—residential or commercial—is the array of tax advantages available. When you replace or repair a major appliance in a rental unit, however, it’s important to consider how that expense affects your taxes. In particular, replacing an air conditioning system may qualify for depreciation—a strategy that allows you to spread out the tax savings from your investment over several years.
Below, we’ll break down how A/C depreciation works and why it matters to rental property owners.
What Is Air Conditioner Depreciation?
When you repair or replace a product inside a rental unit, there are generally two ways the IRS allows you to handle the cost:
Repairs – If you repair an item like an air conditioner, the cost is considered a deductible expense for that tax year. This is called a single-year deduction.
Replacements/Improvements – If you replace the system entirely, the IRS allows you to depreciate the expense over up to 27.5 years for residential properties.
In simple terms, a repair restores the property to its original state, while a replacement can increase its value. For example, let’s say you spend $1,000 on A/C repairs. You can deduct that full amount in the year the repair was made. But if you invest $3,000 in a brand-new, energy-efficient system, you’d spread the deduction over time—roughly $100+ per year—through depreciation.
While both options offer tax benefits, property owners who plan to hold on to their rental for the long haul may find that depreciation offers better long-term value. Always consult with a tax professional to determine the best approach for your situation.
IRS Rules: Repairs vs. Improvements
The IRS separates property improvements into three categories, easily remembered with the acronym BAR:
Betterments
Adaptations
Restorations
If your new A/C unit improves the performance, capacity, or quality of the property—say by upgrading from an old system to a more powerful, energy-efficient one—it likely qualifies as a betterment and is subject to depreciation rather than a one-time deduction.
Adaptations apply if the A/C system is part of a larger project, such as an addition or a major remodel that changes how the space is used. Though this is less common, it still qualifies under depreciation.
Restorations apply when the new A/C unit brings the property back to its previous value after damage or deterioration. This also falls under depreciation.
In Summary
While HVAC upgrades may seem like a straightforward maintenance decision, understanding how the IRS treats those expenses can impact your bottom line. An experienced accountant can guide you through the tax side of your investment, while a licensed HVAC professional can help you choose the right system to increase your property's value, efficiency, and tenant satisfaction.