For a Rental Apartment, Is This Cost A Repair or an Improvement?

His solution was to replace the leaking walls with a series of panels. Some of the panels contained windows so that the end result was functionally the same as the original design. The total cost of the job included the engineering fees, building permits, legal costs, panel costs and the cost of a construction crew to tear out the old wall and install the new panels.

Question: Are the costs associated with this project considered to be repair costs deductible from rental income in 2014 or are they capital costs that have to be depreciated over 27+ years? ========== Here's my thinking:

1) It's a replacement, not the addition of something new, so it is not forced to be capital. 2) Does this extend the useful life of the structure in some way. I venture not. 3) This is unlikely to be of low cost (under $500), so it's not clearly a repair. Therefore, based on the simple example as given, I see no clear answer.

It seems to be more capital in nature, but I'd say an argument could be made either way. Note that there were new regulations issued this year with regard to this topic (of piecemeal replacement of parts of a capital asset). Since this was originally an addition, under these new regs you have a known, undepreciated adjusted basis of the leaky structure that can be expensed in addition to depreciating its replacement. I believe that solution may be the best answer: Expense out the remaining adjusted basis and depreciate the new construction.

We don't have any information on the cost of the leaky structure as it was contructed by the previous owner. So it appears that the best we can do is to depreciate the repair as new construction. Thanks for your reply.

I would expense it as a repair.

I would expense it as a repair. ============And how does expensing it as a repair fit with the new regulations? That's why I went the other way.

I see it as not so much structural as an exterior wall. It does not create a betterment or extend the life of the building as whole. This is just like the "roof membrane" arguments the IRS lost time and time again, and they recognize their loosing position in the new regulations.

An engineer was hired. I've done engineering and I can't imagine the cost for that was less than $500.

Capitalize the whole thing. Leasehold improvement - 15 years.

Are you saying anything that costs more than $500 must be capitalized?

Are you saying the mere fact that an engineer was hired makes it an improvement? What if the engineer was a structural engineer and he took a look and said "you have no structural issues here, just a membrane issue." That seems to be the case here.

I don't see this is as an improvement or betterment. It is a repair. Expense it.

Essentially that is what happened. The engineer was hired to determine if there were structural issues. He said the existing walls were leaking and could be removed and replaced with a series of 2 foot panels. That is what he and his workers did.