I paid a few thousand dollars to replace the sewer line in the backyard of a rental property. Is this an expense just for this year, or is it depreciable such that the expense is broken up over several years? I've owned rentals for several years and have had some expenses that are depreciable (e.g. when I replaced a furnace) and some that aren't. Is there a guide that can explain to me in plain English (not accounting technical language) what sort of expenses are depreciable and how many years they should be depreciated over?
If I install an awning over the door of the business, it's new, includes the frame, and would be a capital asset that gets depreciated. Next year I'm replacing the fabric, which is almost an annual event given the weather factors, so it's expensed.
"Gil Faver" > the frame, and would be a capital asset that gets depreciated. Next year
Per the Tax Court decision (2002?): Paving over an existing roof without removing it is a repair. Removing the prior roof and putting a new one is a capital improvement.
Here, he removed and replaced the entire line, not a section, and not patching it. It's a capital improvement.
Okay, you've seen other replies by now. So I'll add this based on recent events with a client who also had to replace a sewer line.
If the replacement had been to normal deteriorating conditions and he was advised to replace it sooner than later, it would have been a capital item, and depreciable over 15 years.
However in this case, sewage was erupting and leaking everywhere, hence it was a real emergency. Even though it cost a few thousand, it was a hurried up repair, most essential to continued and uninterrupted use of the business property.
So then we come to the crux of the matter and fall back on IRS dictum: "Facts and circumstances."
"Repairs: A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life
Improvements: An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses."
In this case:
Does replacing the sewer line add value? No, any buyer would expect the property to have a working sewer line. Value would be reduced if it wasn't working, but a working line (be it 1 year old or 20) will not affect the value of the property.
Does it adapt it to new uses? Clearly not.
Does it keep the property in good operating condition? Clearly, yes. It is restoring it to its former operating condition.
Does it prolong useful life? This one is iffy. A building can last 50 or 100 years or even more. (most of my rentals are over 100 years old). They will last another 100 if maintained. Does a replaced sewer line extend this life? I would argue no.
I would (and have) deduct this as a repair.
Now if he was adding a new sewer line to connect up to the sewer system where there was no hookup before, that would be an improvement.
And btw, sometimes replacing is cheaper than repairing. This is almost certainly true for a sewer line; it would be very difficult/expense to gently unearth the one broken section of pipe, remove it, and put a new section in. Much cheaper/faster to just blow the old one up and drop in a replacement. I don't think "replacing" automatically makes something an improvement.
Anyone know the status of proposed regs 1.162-4 and 1.263(a)-0 through
1.263(a)-3? These are supposed to definitively spell out when to capitalize or when to deduct as a repair. I found a discussion on them here:
Can the basis include both the original and the replacement sewer line at the same time? Seems to me there was a disposition of the original sewer line, which may not have been fully depreciated.
better to do as some others have done here, and actually state what the case SAID. What does "removing the roof" mean? Just apply the test stated in the law and the case law. why paraphrase? All that causes is problems.
How is this handled? Is the remaining amount on the depreciation schedule left to run its course over the class life, or is the remaining amount written off in the year of disposition? If the latter, what do you do on the IRS forms? thanks.
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