new roof on rental property


W

way222

After looking over some old posts here, I've learned that
replacing a roof on a rental property has been generally
established as a repair, not a capital item:

From Oberman (47 TC 471): "We think that the expenditure in
question should properly be considered as a deductible
ordinary and necessary business expense rather than a
capital expenditure."

http://groups.google.com/group/misc.taxes.moderated/browse_frm/thread/a1a2831912d11d9b/2760be9ab5da6f54?rnum=1#2760be9ab5da6f54

In 2004 I put a new roof on one of my rentals (removing old
shingles, put on new shingles) in order to fix several leaks
and other issues. On my tax return for that year, I
capitalized the expense using SL 27.5 year period.

Can I go back and amend my return for 2004 and 2005 and
convert it to a repair? Or am I stuck depreciating it, since
that is what I elected to do back then?

Thanks.
 
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M

Mark Bole

In 2004 I put a new roof on one of my rentals (removing old
shingles, put on new shingles) in order to fix several leaks
and other issues. On my tax return for that year, I
capitalized the expense using SL 27.5 year period.

Can I go back and amend my return for 2004 and 2005 and
convert it to a repair? Or am I stuck depreciating it, since
that is what I elected to do back then?
After two years of "incorrect" depreciation, you are better
off just continuing it rather than trying to correct it.

Whether it's roofs or water heaters, one is simply removing
a worn-out component from basis and replacing it with a new
component of the same kind. For example, in a personal
residence, each roof simply replaces the old (removed) one
in the basis, and each water heater likewise. For personal
use it's not deductible, for rental use it's an expense.

This is distinct from an improvement, where the useful life
is*extended*, so for example the excess cost of added
"Super-Duper-Water-Heater" over removed
"plain-old-water-heater" would be added to basis or
depreciated, respectively.

This conclusion is based on something I read in Pub 523:
"You put wall-to-wall carpeting in your home 15 years ago.
Later, you replaced that carpeting with new wall-to-wall
carpeting. The cost of the old carpeting you replaced is no
longer part of your home's adjusted basis."

-Mark Bole
 
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B

BeanTownSteve

Whether it's roofs or water heaters, one is simply removing
a worn-out component from basis and replacing it with a new
component of the same kind. For example, in a personal
residence, each roof simply replaces the old (removed) one
in the basis, and each water heater likewise. For personal
use it's not deductible, for rental use it's an expense.

This is distinct from an improvement, where the useful life
is*extended*, so for example the excess cost of added
"Super-Duper-Water-Heater" over removed
"plain-old-water-heater" would be added to basis or
depreciated, respectively.

This conclusion is based on something I read in Pub 523:
"You put wall-to-wall carpeting in your home 15 years ago.
Later, you replaced that carpeting with new wall-to-wall
carpeting. The cost of the old carpeting you replaced is no
longer part of your home's adjusted basis."

-Mark Bole
Let's look at what the publication 551 actually says...
Table 1. Examples of Increases and Decreases (table edited,
only partial and does not include any decreases,
BeanTownSteve) to Basis Increases to Basis

Capital improvements:
Putting an addition on your home
Replacing an entire roof <______
Paving your driveway
Installing central air conditioning
Rewiring your home

Roof replacement is a capital expenditure, lifetime of over
one year and materially extends the life of the property.
This is different than roof repair. If you elect to replace
a roof rather than repair it, the replacement is STILL an
improvement.

Your carpet example is a bit off, it actually says the cost
of the REMOVED carpet is no longer part of the cost
basis,sorta logical. Argument can be made that carpet is a
decorating item in any event, carpet does NOT extend the
life of the asset, although it too is listed in the pub as
an improvement.

A review of Pub 523 and 551 is in order.
 
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M

Mark Bole

BeanTownSteve said:
Roof replacement is a capital expenditure, lifetime of over
one year and materially extends the life of the property.
This is different than roof repair. If you elect to replace
a roof rather than repair it, the replacement is STILL an
improvement.

Your carpet example is a bit off, it actually says the cost
of the REMOVED carpet is no longer part of the cost
basis,sorta logical. Argument can be made that carpet is a
decorating item in any event, carpet does NOT extend the
life of the asset, although it too is listed in the pub as
an improvement.

A review of Pub 523 and 551 is in order.
And Pub 527 as well. That pub specifically mentions water
heaters, wall-to-wall carpeting, and "new roof" as examples
of improvements.

I must admit upon re-reading my own post I was spurred on to
further research... only to come up fruitless and confused.
After all, what is a "roof"? The shingles? The supporting
timber framing? The plywood sheathing? The nails? Or, for a
new "metal roof" which meets the energy-saving credit
requirements, what is the boundary between the roof and the
rest of the dwelling?

A few things come to mind: let's say I've lived in a
primary residence for several decades and am on my third new
water heater, and first "new roof". Does my basis include
four water heaters and two roofs? What about a rental, does
the answer change?

Two quotes:

"The median age of a home in the U.S. is 32 years, meaning
half of all homes were younger and half older than 32. That
median age is projected to continue to increase."
(http://www.franchise1.com/articles/article.asp?articleid=167)

"According to the Homeownership Alliance, the average age of
the American home will rise to 37 years by 2013."
(http://www.cygnusb2b.com/mediakits/QR_mk.pdf)

So, does replacing a 10-year water heater or 15-year roof
really extend the useful life of a property that might
reasonably last sixty years or more under normal conditions?

I suppose this discussion comes up every year... pointers to
the archives are welcome.

-Mark Bole
 
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D

Dick Adams

In 2004 I put a new roof on one of my rentals (removing old
shingles, put on new shingles) in order to fix several leaks
and other issues. On my tax return for that year, I
capitalized the expense using SL 27.5 year period.

Can I go back and amend my return for 2004 and 2005 and
convert it to a repair? Or am I stuck depreciating it, since
that is what I elected to do back then?
There was a discussion about this a few years ago where the
Tax Court allowed a replacement roof as a repair on rental
property because the roof was leaking. you'll need to find
this and research what has happened since then before you
file an amended return. I suggest you have a Circular 230
tax professional (CPA, EA, Attorney) do it so if per chance
you lose on audit, you can avoid the penalties.

Dick
 
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S

scott s.

Mark Bole said:
(e-mail address removed) wrote:
After two years of "incorrect" depreciation, you are better
off just continuing it rather than trying to correct it.

Whether it's roofs or water heaters, one is simply removing
a worn-out component from basis and replacing it with a new
component of the same kind. For example, in a personal
residence, each roof simply replaces the old (removed) one
in the basis, and each water heater likewise. For personal
use it's not deductible, for rental use it's an expense.
While on this subject, I have had a rental property for many
years. Over that time, I have capitalized the replacement
of many items, all of which were included within the general
"house" which is completely depreciated (though most of the
replacements are still depreciating). The scrapped items
all had nill value, in fact I probably paid to haul them
away. But should I have done some 4797 to reflect the
scrapped items which were replaced? For example, roof,
fence and furnace?

scott s.
 
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W

way222

BeanTownSteve said:
Let's look at what the publication 551 actually says...
Table 1. Examples of Increases and Decreases (table edited,
only partial and does not include any decreases,
BeanTownSteve) to Basis Increases to Basis

Capital improvements:
Putting an addition on your home
Replacing an entire roof <______
The Tax Court decided otherwise in Oberman (47 TC 471).

Here's some further discussion of the case:

http://64.225.235.254/acct/Capitalized-Article-1.aspx
http://www.ustaxcourt.gov/InOpHistoric/Campbell.SUM.WPD.pdf
 
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G

Gil Faver

BeanTownSteve said:
Let's look at what the publication 551 actually says...
Table 1. Examples of Increases and Decreases (table edited,
only partial and does not include any decreases,
BeanTownSteve) to Basis Increases to Basis

Capital improvements:
Putting an addition on your home
Replacing an entire roof <______
Paving your driveway
Installing central air conditioning
Rewiring your home

Roof replacement is a capital expenditure, lifetime of over
one year and materially extends the life of the property.
This is different than roof repair. If you elect to replace
a roof rather than repair it, the replacement is STILL an
improvement.

Your carpet example is a bit off, it actually says the cost
of the REMOVED carpet is no longer part of the cost
basis,sorta logical. Argument can be made that carpet is a
decorating item in any event, carpet does NOT extend the
life of the asset, although it too is listed in the pub as
an improvement.

A review of Pub 523 and 551 is in order.
keep in mind IRS publications are the IRS interpretation of
the law. A review of the actual law, and court
interpretations of the law, is in order. replacing a roof is
a repair, and does not extend the useful life of the
building. Buildings generally last through several new
roofs, at least.
 
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B

Bill Brown

BeanTownSteve said:
Let's look at what the publication 551 actually says...
Let's remember that IRS publications are not authoritative
while Tax Court decisions are.
 
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M

Mark Bole

scott said:
While on this subject, I have had a rental property for many
years. Over that time, I have capitalized the replacement
of many items, all of which were included within the general
"house" which is completely depreciated (though most of the
replacements are still depreciating). The scrapped items
all had nill value, in fact I probably paid to haul them
away. But should I have done some 4797 to reflect the
scrapped items which were replaced? For example, roof,
fence and furnace?

I don't think so, if the items were always part of the
single depreciable "house". Disposition of other separately
depreciated items, yes.

In the first year of a rental, even if the property was
bought in a single transaction, I would normally separate
out personal property such as appliances, and perhaps
15-year property such as fences and such, if it seemed
appropriate, on the depreciation worksheet. (In some parts
of the country it is more common to remove all appliances
upon sale, but not here). The taxpayer of course has to
have a reasonable approach to determining the value of such
property. Then when such appliances are replaced (because
they are broken and worthless), or the entire property is
sold they are reported separately on form 4797. Upon sale
of the entire property, it is not unusual for the FMV of the
appliances to end up being exactly what their remaining
basis is, for a gain of zero. Listing them separately on the
sales contract couldn't hurt. Feedback on this approach
welcome...

-Mark Bole
 
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M

Mark Bole

Dick said:
There was a discussion about this a few years ago where the
Tax Court allowed a replacement roof as a repair on rental
property because the roof was leaking. you'll need to find
this and research what has happened since then before you
file an amended return. I suggest you have a Circular 230
tax professional (CPA, EA, Attorney) do it so if per chance
you lose on audit, you can avoid the penalties.
I just checked Circular 230, and understand that if the
taxpayer discloses a particular position they have taken and
it is deemed non-frivolous, then certain types of penalties
(accuracy-related) can be avoided. But does it say in there
somewhere that simply having a Circular 230 practioner sign
your return will automatically avoid these and other types
of penalties, as opposed to unenrolled practioners?

Regardless, some tax prep businesses will guarantee their
work to the extent of reimbursing penalties and interest
levied if the mistake was theirs, whether Circular 230 or
not.

I'm still wondering whether a roof consists entirely of the
weather-proofing layer (shingles), or also includes the
structural elements (plywood sheets, rafters, trusses or
such). Try "parts roof" in your favorite internet search
engine.

I don't know what the tax courts say, but to me there is an
almost perfect analogy between replacing shingles on a roof
and replacing tires on the wheels (rims) of a car. Do
people who take actual expense deductions for business use
of their vehicle typically depreciate new tires, or include
them as an expense? (The latter, I suspect).

-Mark Bole
 
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B

Brew1

What I have used as a guideline is in Pub. 527. Look at
Page 10, Table 3. Carpet is listed as 5 year property under
GDS. Then look at the last box:

"Additions and improvements, such as a new roof" .... same
recovery period as that of the property.

I will continue to capitalize the cost of a new roof,
although it does appear that if the roofer itemizes his
labor, some of the cost may be considered repair.
 
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H

Harlan Lunsford

While on this subject, I have had a rental property for many
years. Over that time, I have capitalized the replacement
of many items, all of which were included within the general
"house" which is completely depreciated (though most of the
replacements are still depreciating). The scrapped items
all had nill value, in fact I probably paid to haul them
away. But should I have done some 4797 to reflect the
scrapped items which were replaced? For example, roof,
fence and furnace?
That is the procedure. Say you were depreciating a roof
from 1991 for 27.5 years, and you had to replace it (again!)
in 2006. You'e taken 15 years of depreciation yet have
12.5 to go, but there is no roof! You write the remaining
basis off on the form 4797.

ChEAr$,
Harlan Lunsford, EA n LA
 
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H

Harlan Lunsford

Mark said:
BeanTownSteve wrote:
And Pub 527 as well. That pub specifically mentions water
heaters, wall-to-wall carpeting, and "new roof" as examples
of improvements.

I must admit upon re-reading my own post I was spurred on to
further research... only to come up fruitless and confused.
After all, what is a "roof"? The shingles? The supporting
timber framing? The plywood sheathing? The nails? Or, for a
new "metal roof" which meets the energy-saving credit
requirements, what is the boundary between the roof and the
rest of the dwelling?

A few things come to mind: let's say I've lived in a
primary residence for several decades and am on my third new
water heater, and first "new roof". Does my basis include
four water heaters and two roofs? What about a rental, does
the answer change?

Two quotes:

"The median age of a home in the U.S. is 32 years, meaning
half of all homes were younger and half older than 32. That
median age is projected to continue to increase."
(http://www.franchise1.com/articles/article.asp?articleid=167)

"According to the Homeownership Alliance, the average age of
the American home will rise to 37 years by 2013."
(http://www.cygnusb2b.com/mediakits/QR_mk.pdf)

So, does replacing a 10-year water heater or 15-year roof
really extend the useful life of a property that might
reasonably last sixty years or more under normal conditions?

I suppose this discussion comes up every year... pointers to
the archives are welcome.
The roof, yes, adds to basis. The hot water heaters,
however, are personal property and depreciated over 7 years
time, maybe 5 years, but probably not like rental furniture;
I think without looking it up.

ChEAr$,
Harlan Lunsford, EA n LA
 
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H

Harlan Lunsford

keep in mind IRS publications are the IRS interpretation
of the law. A review of the actual law, and court
interpretations of the law, is in order. replacing a roof
is a repair, and does not extend the useful life of the
building. Buildings generally last through several new
roofs, at least.
That particular case which allowed a roof as repair; wasn't
it based on the fact that the whole roof was suddenly and
maybe catostrop..c..ly (sp?) destroyed? And thus the new
roof was immediately essential?

Now, what WAS the name of that case?

ChEAr$,
Harlan Lunsford, EA n LA

Moderator:
My recollection is that the Tax Court decided the property
was not rentable because the roof was leaking. I can't
recall the name either, but we all know my memory ain't
what it use to be.
 
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A

A.G. Kalman

After looking over some old posts here, I've learned that
replacing a roof on a rental property has been generally
established as a repair, not a capital item:

From Oberman (47 TC 471): "We think that the expenditure
in question should properly be considered as a deductible
ordinary and necessary business expense rather than a
capital expenditure."

http://groups.google.com/group/misc.taxes.moderated/browse_frm/thread/a1a2831912d11d9b/2760be9ab5da6f54?rnum=1#2760be9ab5da6f54

In 2004 I put a new roof on one of my rentals (removing
old shingles, put on new shingles) in order to fix several
leaks and other issues. On my tax return for that year, I
capitalized the expense using SL 27.5 year period.

Can I go back and amend my return for 2004 and 2005 and
convert it to a repair? Or am I stuck depreciating it,
since that is what I elected to do back then?
Lots of answers but none that address the question.
Depreciation is a method of accounting. As such, you have
to file Form 3115 and request a change to your method of
accounting for that item.
 
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way222

A.G. Kalman said:
Lots of answers but none that address the question.
Depreciation is a method of accounting. As such, you have
to file Form 3115 and request a change to your method of
accounting for that item.
Holy cow, I just took a look at that form. It's like it is
written in a foreign language.

So what is the procedure - do I file a 3115 and wait for the
IRS to approve it, and then file an amended return; or do I
file everything together?

Or should I head to my friendly neighborhood accountant, as
this is to complicated for someone who is not a pro?
 
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A

A.G. Kalman

Holy cow, I just took a look at that form. It's like it is
written in a foreign language.

So what is the procedure - do I file a 3115 and wait for the
IRS to approve it, and then file an amended return; or do I
file everything together?

Or should I head to my friendly neighborhood accountant, as
this is to complicated for someone who is not a pro?
Head to your friendly neighborhood accountant who can do it
all in one fell swoop.
 
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M

Mark Bole

A.G. Kalman said:
(e-mail address removed) wrote:
Lots of answers but none that address the question.
[...re-reading the thread...]
Depreciation is a method of accounting. As such, you have
to file Form 3115 and request a change to your method of
accounting for that item.
But if it (let's say, "replacing the shingles on an existing
roof") was a repair expense, it never should have been
depreciated, therefore it is a posting error which is
eligible for rectification by amended return subject to the
usual amended return rules.

Definition: a "posting error" is an error in "the act of
transferring an original entry to a ledger."

-Mark Bole
 
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A

A.G. Kalman

[...re-reading the thread...]
Depreciation is a method of accounting. As such, you have
to file Form 3115 and request a change to your method of
accounting for that item.
But if it (let's say, "replacing the shingles on an existing
roof") was a repair expense, it never should have been
depreciated, therefore it is a posting error which is
eligible for rectification by amended return subject to the
usual amended return rules.

Definition: a "posting error" is an error in "the act of
transferring an original entry to a ledger."
Good try, but I believe under Sec. 446, its regs and various
court cases, this was not an error in the act of
transferring the original entry to a ledger. Whether or not
replacing a roof is a repair or a capital improvement is a
matter of all facts and circumstances. Back in 2004, when
the taxpayer capitalized the roof repair no error was made.
The taxpayer, based on all information on hand, made an
election to capitalize the expense. To change 2004 and 2005,
he needs the commissioner's approval for a change in method.
 
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