"Repair" vs "Improvement"?

Brand newby here. Hubby and I just closed on our first investment property (single family home, foreclosure). I’m looking forward to reading all the great threads in this forum (wish I’d discovered it sooner)!

Anyway, we’re replacing the roof and I’m assuming this is considered (for tax deduction purposes) a “repair” and not an “improvement.” But can someone here please confirm that for me – or refer me to a thread or other resource about taxes, expenses, deductions for rental properties?

Thanks!

A new roof is an improvement and is specifically cited as such in the instructions for Schedule E, Page E-6 for Line 14: “…Improvements that increase the value of the property or extend its life, such as replacing a roof or renovating a kitchen, must be capitalized and depreciated (that is, they cannot be deducted in full in the year they are paid or incurred).”

See also IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes)

Keith

Oh. Seems weird to me. I wouldn’t put “kitchen remodel” (which is optional) and “roof replacement” (which is necessary) in the same category, but I can’t argue with the IRS.

Thanks for the reference, Keith!

:biggrin

Your big deduction is normally your Depreciation. Remember: Depreciation is mandatory and must be reclaimed upon sale.

Keith

If you repair a roof it is an expense and can be deducted the total cost on that year’s tax return but if you replace the roof it is capital and must be depreciated over the life of the roof. The question to answer is how much of a roof can you replace whole repair it before you must call it a replacement? I would ask my CPA how much is he comfortable defending.

By the way, if you remodel a kitchen that will be a capital improvment also and must be depreciated.

Not to split hairs, but depreciating a property is optional. Recapture at the sale is mandatory, and is not based on depreciated amount but rather the amount that should have been depreciated. The effect is the same, but technically depreciation is optional.

To a cheapskate like me, that’s the same as “mandatory”…LOL

Keith

I can see these things can get quite complicated. (And I thought just BUYING a house was complicated! :biggrin )

We’re replacing the entire roof (it’s in pretty bad shape).

We’re also painting the interior & exterior, replacing a rotting wooden deck with a concrete patio, replacing some siding, replacing old single-pane windows with double-paned ones, and maybe replacing the carpets (depends on how well they clean up).

Our intent is to get a few rental properties and keep them for the long haul to provide income that will make our retirements a bit cushier.

I can see I’ve got a lot of studying to do. Thanks again for your help, Keith & Bluemoon06!

roof gets capitalized and depreciated over 27.5 years. keep in mind that a roof likely won’t last that long. if you replace it again before it is fully depreciated, you can take any remaining depreciation in the year it is replaced.

I always expense painting as a repair, even if it is part of an extensive renovation as long as the cost can be broken out on the contract. paint never lasts more than a few years, and you would have repainted it anyway even if you did not undertake the renovation. Therefore, the paint is incidental to, not a component of, the remodel.

replacing the patio and windows probably rises to the level of an improvement and should be capitalized.

carpet and floors are capitalized and depreciated, but with current bonus depreciation rules you can still take 50% in year 1 PLUS one year of your regular 5 year depreciation. – it just shows up on a different form and not as a “repair.” Even when bonus depreciation goes away in 2013, you may still qualify for Section 179 deductions. Same benefit.

While a kitchen remodel must be capitalized, be sure to break out the appliances separately. These are depreciated on 5 years (as are new air conditioner systems) and also qualify for bonus and/or Sec 179 treatment in year 1.

Thanks Mark!

Not to split hairs, but depreciating a property is optional. Recapture at the sale is mandatory, and is not based on depreciated amount but rather the amount that should have been depreciated. The effect is the same, but technically depreciation is optional.
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Estrogen Hostage, depreciation expense falls under a concept known as “allowed or allowable”. This essentially means that whether you take the depreciation expense as a deduction on your tax return or you choose not to, the basis in the property is still decreased as if you had taken the depreciation expense. Therefore you definitely don’t want to choose not to take this deduction on your return. :biggrin