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How much to set aside for rental repairs and CapEx

Roofs, furnaces and water heaters wear out on their own schedule. Here's how to estimate a repair and capital expenditure (CapEx) reserve, and how the IRS and the CRA treat the money when you spend it.

Updated October 20, 2026 · by Tidy Landlord

Repairs vs CapEx: two different buckets

Repairs and maintenance are small, frequent jobs: a dripping tap, a broken lock, paint between tenants. Capital expenditures (CapEx) are big, infrequent replacements: a roof, a furnace, a water heater, flooring, appliances. Repairs belong in your monthly budget. CapEx needs a reserve, because the bill arrives all at once.

Rules of thumb (rough estimates only)

Investors use a few shortcuts. None comes from a tax authority or a study of your building, so treat them as starting points:

  • The 1% rule: budget about 1% of the property's value each year for maintenance. It ignores age and condition. (Don't confuse it with the other "1% rule", that monthly rent should be about 1% of the purchase price.)
  • The 50% rule: assume operating expenses, not counting the mortgage payment, eat about half of the rent. It's a quick deal screen, not a repair budget.
  • A flat reserve per door: set aside a fixed amount per unit per month. The right number depends on what's in the unit and how old it is.

The more reliable way is to estimate each big component separately.

Step 1: List the components and their remaining life

List everything expensive that wears out: roof, furnace or boiler, central air or heat pump, water heater, flooring, appliances. Note each one's age and estimate the years left. InterNACHI publishes an estimated life-expectancy chart for home components (InterNACHI chart). A few of its estimates:

  • Asphalt shingle roof: about 20 years (3-tab) to 30 years (architectural)
  • Furnace: 15 to 25 years; central air conditioner: 7 to 15 years; heat pump: 10 to 15 years
  • Conventional water heater: 6 to 12 years
  • Refrigerator: 9 to 13 years; dishwasher: about 9 years
  • Carpet: 8 to 10 years

These are estimates, not promises. Climate, installation, maintenance and tenant use all change them.

Step 2: Price each replacement and divide by the years left

Price each replacement from a recent quote or past invoices, then divide by the months until you expect to replace it. That's a sinking fund: the monthly amount that has the money ready on time. Add some inflation for replacements far away.

A worked example: a duplex

These numbers are made up to show the method, not price data. A duplex has:

  • Roof: $14,000, 12 years left: $14,000 ÷ 144 months = $97.22 a month
  • Two furnaces: $10,000, 8 years left: $10,000 ÷ 96 = $104.17
  • Two water heaters: $3,200, 4 years left: $3,200 ÷ 48 = $66.67
  • Two sets of fridge and range: $4,800, 6 years left: $4,800 ÷ 72 = $66.67
  • Flooring in both units: $6,000, 5 years left: $6,000 ÷ 60 = $100.00

The total is $434.73 a month, or about $217 per door, before inflation. Compare that with the 1% rule: on a $500,000 duplex it says $5,000 a year, about $417 a month. Here they land close together, but a duplex with a new roof would need far less. Keep the reserve in a separate account, budget routine repairs on top, and update the list yearly.

Taxes in the US: repair or improvement?

  • Repairs that keep the property in ordinarily efficient operating condition, like fixing a broken lock or painting a room, are deducted on Schedule E, line 14 (Schedule E instructions).
  • Improvements must be capitalized. An expense is an improvement if it results in a betterment, restores the property (for example, replacing a substantial structural part) or adapts it to a new use; a new roof, a furnace and a water heater are on the list of examples (IRS Pub. 527). Improvements are generally depreciated as separate property: 27.5 years for the building and its structural components, 5 years for appliances and carpets used in residential rentals (Pub. 527, Table 2-1).
  • De minimis safe harbor: if you make the annual election, you can deduct items costing up to $2,500 per invoice or item (for taxpayers without an applicable financial statement) instead of capitalizing them; Pub. 527 says they go on Schedule E, line 19. The election is a statement attached to your timely filed return (IRS tangible property regulations FAQ).
  • Two other safe harbors may help: routine maintenance you expect to do more than once in 10 years on a building system, and the safe harbor for small taxpayers (average gross receipts of $10 million or less, building basis of $1 million or less, with yearly repairs and improvements on it of no more than the lesser of 2% of its unadjusted basis or $10,000).
  • Money you move into a reserve account isn't an expense. What counts is the repair or replacement when you pay for it.

Taxes in Canada: current or capital expense?

  • Current expenses, such as repairs that restore the property to its original condition, are deducted on line 8960 of Form T776, repairs and maintenance, in the year you incur them.
  • Capital expenses are claimed over time as capital cost allowance (CCA). The CRA's tests in guide T4036: does it give a lasting benefit (vinyl siding is capital, repainting is current)? Does it improve the property beyond its original condition (replacing wooden steps with concrete ones is capital, repairing them is current)? Is it a separate asset (a refrigerator is capital) or a part of the building (rewiring is usually current)?
  • A large bill for overdue ordinary maintenance is still a current expense, but repairs to make a used property you just bought suitable for use are usually capital.

Keep every replacement invoice and the date it went into service; you'll need them for depreciation or CCA, and when you sell.

Frequently asked questions

How much should a landlord set aside for repairs and CapEx?

There's no single right number; rules of thumb like 1% of value a year are rough estimates. A sinking fund is better: divide each component's replacement cost by the months it has left.

What is the 50% rule for rental property?

A rough shortcut that assumes operating expenses, not counting the mortgage, take about half the rent. Real expenses can be much higher or lower.

Is a new roof a repair or an improvement for taxes?

In the US, a new roof is listed as an improvement in IRS Publication 527, so it's capitalized and depreciated. In Canada, apply the CRA's T4036 tests: restoring the original condition points to a current expense; improving it or giving a lasting benefit points to capital.

Can I deduct money I put in a repair reserve?

No. The set-aside is just savings. You deduct a repair, or capitalize an improvement, when you actually pay for the work.

Sources

This guide is general information, not tax, legal or accounting advice. Rules of thumb and life expectancies are rough estimates, not predictions for your building, and costs vary widely by region and condition. Tax rules change; check the official sources linked above and ask a tax professional how they apply to you.

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