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NEW ROOF - EXPENSE OR CAPITALIZE?

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Client renting out business building (Sch E). New roof added in Mar 2008 replacing old one installed in 1999 with 39Y S/L

depreciation. In checking with other preparers I get a variety of opinions - some are saying expense it while others are saying capitalize it. One firm told me if the repair is less than 50% expense it, if in excess of 50% then capitalize it and depreciate for 39Y. Another person belonging to a local Chapter stated that a COURT RULING came out in 2002 stating roofs could be expensed and need not be capitalized, and this has been their policy since 2002. Has anyone heard of this ruling? and too, can we rely on such rulings in our tax practice? I've looked at several publications in which building components are listed but the ROOF is conspiciously absent. In looking at QF book & their depreciation manual; the TAX BOOK, PPC AND GEAR UP, the word ROOF is no where to be found. Does that help us any for expensing, at least for 2008?

Repairs vs. Improvements has always been a continuing controversy. Possibly the new proposed regulations may put an end to such. See page 7-6 of the TAX BOOK on details, and take special note on how they define BETTERMENT & RESTORATION as Capital Improvements. Any suggestions?

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>>a COURT RULING came out in 2002<<

There have been dozens of court rulings on this question, but only two that particular year. One indeed said that roof repairs can be expensed, but that was only a summary opinion that can never be cited as precedence. The other was a memorandum decision that even partial replacement of a roof did have to be capitalized. In my opinion, it is irresponsible and unprofessional to have a "policy" of expensing roofs. Tax treatment should depend on the facts and circumstances of the particular property for the particular taxpayer. Follow the links in this thread to learn how to analyze those.

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Client renting out business building (Sch E). New roof added in Mar 2008 replacing old one installed in 1999 with 39Y S/L

depreciation. In checking with other preparers I get a variety of opinions - some are saying expense it while others are saying capitalize it. One firm told me if the repair is less than 50% expense it, if in excess of 50% then capitalize it and depreciate for 39Y. Another person belonging to a local Chapter stated that a COURT RULING came out in 2002 stating roofs could be expensed and need not be capitalized, and this has been their policy since 2002. Has anyone heard of this ruling? and too, can we rely on such rulings in our tax practice? I've looked at several publications in which building components are listed but the ROOF is conspiciously absent. In looking at QF book & their depreciation manual; the TAX BOOK, PPC AND GEAR UP, the word ROOF is no where to be found. Does that help us any for expensing, at least for 2008?

Repairs vs. Improvements has always been a continuing controversy. Possibly the new proposed regulations may put an end to such. See page 7-6 of the TAX BOOK on details, and take special note on how they define BETTERMENT & RESTORATION as Capital Improvements. Any suggestions?

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I have toiled with this issue many times. An article in Corporate Business Taxation Monthly the October 2008 issue addressed this. It is titled "The Tax Aspects of Roof Replacements" I would suggest that you put this in your search engine. It stated that recent proposed and re-Proposed regulations aimed at codifying tax case law make it clear that in certain cases required expenditures for a replacement roofs including materials and installation labor can be expensed as repairs for tax purposes. Before I read this I generally was of the opinion a new roof had to capitalized. There are three tests. The betterment, the restoration & the adaptation.

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A link in the link above is to the article Icount is referencing.

In addition consider this proposed regulation under 263, if this is still in effect.

(3) REPLACEMENT OF A MAJOR COMPONENT OR A SUBSTANTIAL STRUCTURAL PART--

(i) IN GENERAL. For purposes of paragraph (g)(1)(vi) of this section, the replacement of a major component or a

substantial structural part means the replacement of--

(1) A part or a combination of parts of the unit of property, the cost of which comprises 50

percent or more of the replacement cost of the unit of property; or

(2) A part or a combination of parts of the unit of property that comprise 50 percent or more of

the physical structure of the unit of property.

(ii) EXCEPTION. An amount paid is not required to be capitalized under paragraph (g)(1)(vi) of this section

if it is paid during the recovery period prescribed in section 168© (taking into account the applicable

convention) for the property, regardless of whether the property is depreciated under section 168(a).

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>>a COURT RULING came out in 2002<<

There have been dozens of court rulings on this question, but only two that particular year. One indeed said that roof repairs can be expensed, but that was only a summary opinion that can never be cited as precedence. The other was a memorandum decision that even partial replacement of a roof did have to be capitalized. In my opinion, it is irresponsible and unprofessional to have a "policy" of expensing roofs. Tax treatment should depend on the facts and circumstances of the particular property for the particular taxpayer. Follow the links in this thread to learn how to analyze those.

Totally agree! If the roof was replaced and not repaired, you should capitalize the replacement.

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If you capitalize the new roof, you can write off any remaining undepreciated cost of the old roof.

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Papa Joe, unfortunately it is possible that you can not write off the remaining roof "adjusted basis" as an expense.

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RoyDaleOne, I don't understand your sentence in your last post.

The original post said the new roof replaced one that was placed in service in 1999. I assumed, since the post did not indicate that it was an allocation of the total purchase price, that this was a roof placed in service in 1999 on a building that was purchased before 1999. If the roof only lasted 9 years, it would have some amount of remaining cost which was "abandoned" when the 1999 roof was replaced. That cost could be written off.

Or have I misunderstood the whole question?

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I agree with PapaJoe. The remaining basis is a write off. See page 10-2 of 1040 QF Handbook

regarding Abandonment of Depreciable Property, which points out that "In order to deduct a loss from physical abandonment the taxpayer must intend to irrevocably discard the asset so that it will neither be used nor retrived by the taxpayer for sale, exchange or other dispo.". This is very fitting

to this situation. EThanx for all the discussion on this.

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See Field Service Advice 200001005 September 10, 1999

See Field Service Advice 200141026 July 11, 2001

"The abandonment or retirement of a structural component of a building does not constitute a disposition. Accordingly, no loss deduction is allowed on the retirement of such property. The taxpayers continues to recovery the cost of such property through, .."depreciation"... deductions"

See also Prop. Reg. 1.168-2(1)(1) and 1.168-6 provide no disposition on retirement.

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I stand corrected, RoyDaleOne. Always glad to learn something new.

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PapaJoe, I love to learn new things, or me too.

And, the many times I am wrong is alright too, because I am learning.

Thanks...

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PapaJoe, I am not convinced that you were wrong under the circumstances you outlined above.

It seems to me that the 1999 replacement is considered a separate structure and as RoyDaleOne says there would be no write off of the roof component of the original structure.

But if the 1999 roof fails and you have to replace it then you are not dealing with a component of a structure, rather you are dealing with the separate structure you set up in 1999. Accordingly, you should write off the unrecovered cost of the 1999 roof.

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My original comment was that under the regulations for 263 you could expense the new roof...... if during the recovery period.

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Over the past several days I have been looking at references and talking with local Chapter people, other tax preparers and all these discussions led me to believe that we can deduct the remaining basis in the roof as stated by PapaJoe in his post #9. Yesterday I called NATP for an opinion in this matter and today they called stating that their review supports the fact that the remaining basis can be deducted. What Now!!

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>>they called stating that their review supports the fact that the remaining basis can be deducted<<

Did they happen to state that the CODE and REGS support the fact? I mean, if "their review" covers the same non-authority references that you yourself are reviewing, they will find the same non-authority support that you are finding. You would

be no closer to anything you can use, so did they happen to state anything else?

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NATP mentioned that a disposition does not include the retirement of a structural component of a 15 year real property. They then made further reference to Prop Reg. 1-168-6 - GAIN OR LOSS ON DISPOSITIONS, subpara (a)(2) which says IF THE ASSET IS DISPOSED OF BY PHYSICAL ABANDONMENT: Loss shall be recognized in the amount of the adjusted basis of the asset at the time of the abandonment. For a loss to qualify for recognition under this subparagraph (2), the taxpayer must intend to discard the asset irrevocably so that he will neither use the asset again, nor retrieve it for sale, exchange, or other disposition.

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