Hi,
I received an insurance claim for hail damage on my rental property. I paid the whole amount to a contractor who performed the items in the claim - new roof, new siding on 3 sides, new gutters. The house was 5 years old since new. Does this have any consequences on my taxes?
Thanks!
If insurance proceeds exactly covered all the repair costs, then no. If repair costs exceeded the insurance payment, you have a tax deduction. If the insurance payment exceeded the repair costs, then you have a foolish insurance company.
Short answer: Yes. The amount that you paid NOT reimbursed by insurance is either a repair (unlikely) or a capital improvement (likely) that offsets the casualty loss you should have taken for the damage event.
Some may choose to give you a longer, clearer answer.
My esteemed colleague, Mr. Stussy, and I will be disagreeing on this point. He says its likely a capital improvement and NOT a repair and I believe it IS a repair.
The issue hinges on whether the work "substantially improved or added to the useful life of the property" based on the properly value PRIOR to the damage. There is no question that AFTER the damage the work improved the property and made it usable again, but that is NOT the test.
If the work merely got the property back to its original condition it gets treated as a repair and is deductible in the year you paid it. Do note that you cannot get a deduction for anything paid for by the insurance company or for which you were reimbursed. So if the repairs costs $10K and insurance paid you $8K, the $2K you spent out of pocket is a deductible repair expense in the year you wrote that check.
Gene E. Utterback, EA, RFC, ABA
I don't disagree. My answer was vague because I felt that the condition of the property after the event was vague. The repair could be expensed, capitalized, or partly both. Note also that the deduction of a casualty loss may force capitalization of the repair because the taxpayer got a benefit for the (involuntary) removal of part of the structure, so adding that removed structure back is adding something that for tax purposes wasn't immediately previously there.
The OP said that HE paid for the restoration but did not say whether the insurance payment covered the entire amount of loss. Therefore, we can't rule out that there wasn't a casualty loss deduction.
The day before the hail, the roof had a remaining lifetime of 25 years. The day after the repair, it had a remaining lifetime of 30 years. Does that qualify as "original condition" or is it a capital improvement.
Seth
The insurance company is not necessarily foolish. Sometimes the insurance company gets an appraisal of how much it will cost to repair the damage, and they pay this amount, and if you get it done for less you get to pocket the difference, but must report the income one Line
21 Other.
did the life of the BUILDING get extended? if not, it is a repair.
How does the above situation change if the insurance proceeds are received in one tax year - say 2011 - but the repairs are not done until
2012? I presume Other Income in 2011 and then repair expense in 2012 since individual taxpayer is on cash basis. Any other thoughts or ideas? Thanks, Cathy H.
But how does putting on a new roof "merely get the property back to its original condition"?
The original condition was a house with a five-year-old roof. Now the house is a house with a brand new roof. So why would that be considered a repair and not an improvement?
Does it hinge on the meaning of "substantial"? Extending the life of the roof five years isn't "substantial" enough? If so, what's the line between substantial and non-substantial?
(I would think this issue would come up whenever major repairs are done -- there's really no way to do such a repair such that the structure won't be improved from what it was the moment before the damage happened.)
But how does putting on a new roof "merely get the property back to its original condition"?
The original condition was a house with a five-year-old roof. Now the house is a house with a brand new roof. So why would that be considered a repair and not an improvement?
Does it hinge on the meaning of "substantial"? Extending the life of the roof five years isn't "substantial" enough? If so, what's the line between substantial and non-substantial?
(I would think this issue would come up whenever major repairs are done -- there's really no way to do such a repair such that the structure won't be improved from what it was the moment before the damage happened.)
Interesting.
That would seem to open the door to an "upgrade in pieces" approach :).
After several years of this I have an asset which will have a significantly longer life than the original asset did, but at no stage did I increase the life substantially. :)
But more seriously...
Wouldn't the approach in your paragraph above relegate almost everything to repairs rather than asset purchases, unless you're doing major upgrades?
I repeat. If you spent the entire insurance proceeds on repairing the damage done by the hail, then you have zero taxable income and zero change in basis in your property.
If you spent more than the insurance proceeds, then maybe you have a deductible expense and maybe you have a capital item. By the way, it is well established that the cost restoring a leaky roof to it's pre- leaky condition is a currently deductible expense even if the roof had to be stripped down to the rafters.
The roof would have to be damaged in some way for any expenditure to treated as a deductible repair expense. Same for the siding.
It would be treated the same as deducting income taxes paid in one year and getting a refund of some of those taxes in a later year. In other words, apply the tax benefit doctrine.
Damaged through an identifiable event (like a hailstorm or hurricane)? Or damaged through passage of time?
passage of time is sufficient.
An upgrade in pieces is an interesting slant that I had not considered, but on first blush I don't think that would work. The BIG caveat here is that I assume we're talking about a taxpayer or tax pro whose intention is to do it right and NOT ignore the law and deliberately misclassify something. With that being said -
The first reason this won't work is because IF you did it in pieces, year after year, the changes would be happening so close to the original "in-service" date that its likely that work would NOT significantly extend or prolong the useful life. If I put a $20K roof on a house I've had for one year, then $20K in siding on the same house that I've now owned 2 years - neither of these would make much difference.
The second reason this won't work is because for it to be a repair there has to be something wrong with what is being replaced. A new roof, or new siding or new A/C unit doesn't NEED repair. Upgrades are different. I think my example included replacing a shingle roof with imported Spanish terra cotta tile. If a shingle roof WOULD have cost $2K but the terra cost $20K it would be more of an upgrade - at the most aggressive it would be $2K in repairs and $18K in upgrades.
And it isn't that MY approach does this, it?s a matter of the facts and circumstances of the situation. Getting something back to where it was IS different than making it better than it was.
Gene E. Utterback, EA, RFC, ABA
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