New Roof on a Rental property...Expense or capitalize?

[Guest Taxed]

Thanks Slippery Pencil for the research. You must have some time on your hand to do the research. i am trying to catch up with pending cases!

I think if you read the examples and look at the intent of the law, the facts of the situation and the intent of the taxpayer to repair/replace plays a critical role. I am no lawyer but I am getting the feeling that if the repair (including replacement of all the shingles) was caused by a leak or storm damage then it may be expensed. Whereas when one replaces the roof because 25 or 30 years have gone by and you know it is borrowed time before the shingles curl up and break off, then it is capitalize.

Basically if the roof shingles have "lived its useful life" and then you replace it is capitalize, BUT if you had a 5 yr roof and storm ripped it off and you had to replace then it is expense. Does this make sense???

I can't remember a situation where one of my landlord clients replaced a roof unless the shingles were curling. It is a very expensive job and no one wants to tackle it unless absolutely necessary.

[KEYWEST_RICKS]

am not sure the situation in Northen can be duplicated with every roof replacement:

"The building was rented to Environmental Care Inc. (Environmental). One of Environmental’s jobs was to provide all the Christmas decorations for the World Trade Center in San Francisco, California. During the year in issue, the roof leaked, damaging Environmental’s materials. Environmental’s personnel complained to petitioner and even threatened legal action.

"Petitioner hired Armstrong Roofing (Armstrong) to stop the leaks and install a foam roofing system. The acting roof superintendent (superintendent) examined the roof and found it “basically * * * intact” except for one location “where water was coming through, almost like a river.”

"Twenty eight sheets of plywood on the roof were replaced due to dry rot. The superintendent explained that it was not necessary to remove the tar and gravel from the roof. However, Armstrong’s company policy was to remove all tar and gravel down to the plywood roof, spray the primer on, and top it off with a spray polyurethane foam coating. There were no structural changes made to the roof. The entire roof was sprayed to protect Armstrong against any potential liability in the future.

"The leaks were located under the rooftop air conditioning unit. In order to gain access to that area and stop the leaks, petitioner’s contractors had to move and replace the air conditioner with a crane, place supports under the air conditioner when it was replaced, disconnect and reconnect the gas lines, and install new electrical conduits."

The Court cited Oberman Manufacturing 47 TC 471 but made this statement in finding the 50K that Northen spent a repair: "there was no replacement or substitution of the roof." So here I would note that the word 'replacement' was considered a differentiation.

The OP does not say the roof was leaking or that the dire consequences faced by Northen would occur, so here it would seem capitlization is in order.

[Slippery Pencil]

The research was done years ago for appeals. I just updated the inflation adjusted numbers to current.

Brick buildings should last centuries. If I put 30 year shingles on a building that should last centuries, that's an expense. 30 years later when I replace those shingles, that's an expense. It adds no value or useful life to the building.

[Janitor Bob]

Now I am re-thinking along the same lines that led me to the original post.....This roof "repair" (which at only $6,000 is likely only removing and adding a new layer of shingles as opposed to new substructure) does not increase the value, size, or useful life of the house....I think I'll expense

[jetaxes]

One year I had a leak on one side of my office roof

Got it repaired

and

2 years later the other side had a leak

Wrote that off too!

[Guest Taxed]

jetaxes did you replace the whole roof stripping it to the deck and complete reshingle or just a patch repair of the area where it was leaking. If it is the latter then i would agree that it is expensing.

This controversy could not have erupted at a better time. Next year I will have to decide whether to replace (strip down to the deck and reshingle) or just add another layer of shingles on top. Obviously expensing will have a significant impact on my net profits and SE!!! It is a 400sq roof of my office. It is a separate structure so direct expenses.

[Janitor Bob]

Upon further review of my situation, I realized that the current roof was over 30 years old end of its useful life. Therefore, since new roof IS extending the life of the home, I am capitalizing and depreciating

[Slippery Pencil]

How does it extend the life of the building? Saying it does it like saying replacing a broken window pane extends the life of the building. Having a functioning roof doesn't extend the original life of the building. The life of the building is the life if properly maintained. By not making the repair you are shortening the expected life of the building. A $6000 roof, that's an expense no questions asked.

[mcb39]

Are you saying that when I add the construction of my new office addition to the fixed assets for my business, that I should depreciate the construction; ie: walls, basement, ceramic floors, etc; and then expense the cost of the steel roof? NO WAY!!!! I will expense the blinds, the furnishings, the electronics; but what should I do with the composite deck that connects it to the rest of the house?

This entire thread has been argument for the sake of argument. Consider each case separately. If it was a repair, it was a repair. If it was a newly constructed roof, imo; it is depreciated. In this part of the country, it is possible to totally reconstruct a really decent roof for $6000.

[basilmathews]

The post was really good and informative, thanks slippery.

<a href="http://www.rooflines.com/products/asphalt-shingle-roofing/">Shingle Roofing</a> is durable and long lasting throughout the years. Shingle roofing is one of the most popular types of residential roof material used these days. They are relatively inexpensive. The geographical location, slope of the roof, height of the building, ease of access to the premises, complexity of the project and the type of shingle determine the cost of shingles. since their maintenance cost is also less.

[TaxMan60601]

Well, sleep well JB!

I think you are free to do whatever you want - you can either capitalize or expense!

For those who have more time to read:

http://www.irs.gov/irb/2012-14_IRB/ar05.html

and

http://www.irs.gov/irb/2013-03_IRB/ar13.html

"D. Safe harbor for routine maintenance

... Because buildings typically have a long class life (for example, 39.5 years for nonresidential real property), many remodeling projects arguably could be deducted under the safe harbor, regardless of the nature or extent of the work involved. For example, if a taxpayer expected to replace a major component, such as a roof, an HVAC system, or an electrical system, more than once during the long class life of the building, then the costs of such replacements generally would have been deductible under the safe harbor. Allowing a deduction for costs attributable to these types of projects is inconsistent with much of the case law addressing building improvements. Generally, the courts have held that amounts paid for replacements of major components or substantial structural parts of buildings and their structural components are capital expenditures."

and

"The temporary regulations revise the 2008 standards in several respects to achieve results that are more consistent with current law. The temporary regulations retain the general rule that the unit of property for a building is comprised of the building and its structural components. The temporary regulations, however, require that a taxpayer apply the improvement standards separately to the primary components of the building, that is, the building structure or any of the specifically defined building systems. Thus, a cost is treated as a capital expenditure if it results in an improvement to the building structure or to any of the specifically enumerated building systems. The temporary regulations define the building structure as the building (as defined in §1.48-1(e)(1)) and its structural components (as defined in §1.48-1(e)(2)) other than the components specifically enumerated as building systems. The temporary regulations define building systems to include (1) the heating, ventilation, and air conditioning systems (“HVAC”); (2) the plumbing systems; (3) the electrical systems; (4) all escalators; (5) all elevators; (6) the fire protection and alarm systems; (7) the security systems; (8) the gas distribution systems; and (9) any other systems identified in published guidance."

Pheew ....

I never knew that one can expense purchase of a 20 brand new elevators ... in case that one is for example the biggest US construction corp doing the highest and most expensive skyscraper ever, with lets say 1000 of them

A big Thank you to Slippery Pencil and all of you for the very useful shared experience on this theme!

mcb39: "This entire thread has been argument for the sake of argument. Consider each case separately. If it was a repair, it was a repair. If it was a newly constructed roof, imo; it is depreciated. In this part of the country, it is possible to totally reconstruct a really decent roof for $6000."

I think these are the key words here, in this thread.

Just my 2p.

[Slippery Pencil]

Are you saying that when I add the construction of my new office addition to the fixed assets for my business, that I should

No one said anything of the sort. I suppose if you make ridiculous claims, then it does amount to nothing other than argument for argument sake.

[ari]

can you get a credit for something like this even though not personal residence? ck 5695

[Edward]

The following is taken from QF Depreciation Handbook:

Expenditures that do not materially add to the property's value, appreciably prolong it life or make it suitable for a different use are incidental repairs or maintenance and are generally expensed. (Reg 1.162-1(a)). Whether a cost is an ordinary repair or should be capitalized has been a source of much controversy. Courts often test expenditures by looking at whether the cost "puts" an asset in working condition (capital expense) or "keeps" it there (repair). Also, amounts expended to restore property to its original condition are repairs. According to IRS Pub 535, examples of capital EXPENDITURES include new electric wiring, a NEW ROOF, a new floor, new plumbing, bricking up windows to strengthen a wall and lighting improvements. Other examples of deductible repairs include (a) Reconditioning floors (but not replacement); ( Repainting interior and exterior walls; © Cleaning and repairing ROOFS and gutters; and (d) Fixing plumbing leaks(but not replacement of fixtures.

PRACTICE TIP; IRS has issued a Capitalization versus Repairs Audit Technique Guide (ATG). The ATG outlines the items that IRS examiners are instructed to consider when determining whether an expenditure should be capitalized or expensed as repairs.

Court Cases in regards to roof repairs are: Oberman Manufacturing Co., 47 TC 471 (1967); Campbell, Nevia, TC Summary Op> 2002-117; and Stark, Dennis. TC Memo 1999-1..