new roof on rental property

After two years of "incorrect" depreciation, you are better off just continuing it rather than trying to correct it. Whether it's roofs or water heaters, one is simply removing a worn-out component from basis and replacing it with a new component of the same kind. For example, in a personal residence, each roof simply replaces the old (removed) one in the basis, and each water heater likewise. For personal use it's not deductible, for rental use it's an expense. This is distinct from an improvement, where the useful life is*extended*, so for example the excess cost of added "Super-Duper-Water-Heater" over removed "plain-old-water-heater" would be added to basis or depreciated, respectively. This conclusion is based on something I read in Pub 523: "You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis."

-Mark Bole

Let's look at what the publication 551 actually says... Table 1. Examples of Increases and Decreases (table edited, only partial and does not include any decreases, BeanTownSteve) to Basis Increases to Basis Capital improvements: Putting an addition on your home Replacing an entire roof

And Pub 527 as well. That pub specifically mentions water heaters, wall-to-wall carpeting, and "new roof" as examples of improvements. I must admit upon re-reading my own post I was spurred on to further research... only to come up fruitless and confused. After all, what is a "roof"? The shingles? The supporting timber framing? The plywood sheathing? The nails? Or, for a new "metal roof" which meets the energy-saving credit requirements, what is the boundary between the roof and the rest of the dwelling? A few things come to mind: let's say I've lived in a primary residence for several decades and am on my third new water heater, and first "new roof". Does my basis include four water heaters and two roofs? What about a rental, does the answer change? Two quotes:

"The median age of a home in the U.S. is 32 years, meaning half of all homes were younger and half older than 32. That median age is projected to continue to increase."

7) "According to the Homeownership Alliance, the average age of the American home will rise to 37 years by 2013." So, does replacing a 10-year water heater or 15-year roof really extend the useful life of a property that might reasonably last sixty years or more under normal conditions? I suppose this discussion comes up every year... pointers to the archives are welcome.

-Mark Bole

There was a discussion about this a few years ago where the Tax Court allowed a replacement roof as a repair on rental property because the roof was leaking. you'll need to find this and research what has happened since then before you file an amended return. I suggest you have a Circular 230 tax professional (CPA, EA, Attorney) do it so if per chance you lose on audit, you can avoid the penalties.

Dick

While on this subject, I have had a rental property for many years. Over that time, I have capitalized the replacement of many items, all of which were included within the general "house" which is completely depreciated (though most of the replacements are still depreciating). The scrapped items all had nill value, in fact I probably paid to haul them away. But should I have done some 4797 to reflect the scrapped items which were replaced? For example, roof, fence and furnace? scott s.

keep in mind IRS publications are the IRS interpretation of the law. A review of the actual law, and court interpretations of the law, is in order. replacing a roof is a repair, and does not extend the useful life of the building. Buildings generally last through several new roofs, at least.

I don't think so, if the items were always part of the single depreciable "house". Disposition of other separately depreciated items, yes. In the first year of a rental, even if the property was bought in a single transaction, I would normally separate out personal property such as appliances, and perhaps

15-year property such as fences and such, if it seemed appropriate, on the depreciation worksheet. (In some parts of the country it is more common to remove all appliances upon sale, but not here). The taxpayer of course has to have a reasonable approach to determining the value of such property. Then when such appliances are replaced (because they are broken and worthless), or the entire property is sold they are reported separately on form 4797. Upon sale of the entire property, it is not unusual for the FMV of the appliances to end up being exactly what their remaining basis is, for a gain of zero. Listing them separately on the sales contract couldn't hurt. Feedback on this approach welcome...

-Mark Bole

I just checked Circular 230, and understand that if the taxpayer discloses a particular position they have taken and it is deemed non-frivolous, then certain types of penalties (accuracy-related) can be avoided. But does it say in there somewhere that simply having a Circular 230 practioner sign your return will automatically avoid these and other types of penalties, as opposed to unenrolled practioners? Regardless, some tax prep businesses will guarantee their work to the extent of reimbursing penalties and interest levied if the mistake was theirs, whether Circular 230 or not. I'm still wondering whether a roof consists entirely of the weather-proofing layer (shingles), or also includes the structural elements (plywood sheets, rafters, trusses or such). Try "parts roof" in your favorite internet search engine. I don't know what the tax courts say, but to me there is an almost perfect analogy between replacing shingles on a roof and replacing tires on the wheels (rims) of a car. Do people who take actual expense deductions for business use of their vehicle typically depreciate new tires, or include them as an expense? (The latter, I suspect).

-Mark Bole

What I have used as a guideline is in Pub. 527. Look at Page 10, Table 3. Carpet is listed as 5 year property under GDS. Then look at the last box: "Additions and improvements, such as a new roof" .... same recovery period as that of the property. I will continue to capitalize the cost of a new roof, although it does appear that if the roofer itemizes his labor, some of the cost may be considered repair.

That is the procedure. Say you were depreciating a roof from 1991 for 27.5 years, and you had to replace it (again!) in 2006. You'e taken 15 years of depreciation yet have

12.5 to go, but there is no roof! You write the remaining basis off on the form 4797. ChEAr$, Harlan Lunsford, EA n LA

The roof, yes, adds to basis. The hot water heaters, however, are personal property and depreciated over 7 years time, maybe 5 years, but probably not like rental furniture; I think without looking it up. ChEAr$, Harlan Lunsford, EA n LA

That particular case which allowed a roof as repair; wasn't it based on the fact that the whole roof was suddenly and maybe catostrop..c..ly (sp?) destroyed? And thus the new roof was immediately essential? Now, what WAS the name of that case?

ChEAr$, Harlan Lunsford, EA n LA

Moderator: My recollection is that the Tax Court decided the property was not rentable because the roof was leaking. I can't recall the name either, but we all know my memory ain't what it use to be.

Lots of answers but none that address the question. Depreciation is a method of accounting. As such, you have to file Form 3115 and request a change to your method of accounting for that item.

-- Alan

Holy cow, I just took a look at that form. It's like it is written in a foreign language. So what is the procedure - do I file a 3115 and wait for the IRS to approve it, and then file an amended return; or do I file everything together? Or should I head to my friendly neighborhood accountant, as this is to complicated for someone who is not a pro?

Head to your friendly neighborhood accountant who can do it all in one fell swoop.

-- Alan

[...re-reading the thread...]

But if it (let's say, "replacing the shingles on an existing roof") was a repair expense, it never should have been depreciated, therefore it is a posting error which is eligible for rectification by amended return subject to the usual amended return rules. Definition: a "posting error" is an error in "the act of transferring an original entry to a ledger."

-Mark Bole

Good try, but I believe under Sec. 446, its regs and various court cases, this was not an error in the act of transferring the original entry to a ledger. Whether or not replacing a roof is a repair or a capital improvement is a matter of all facts and circumstances. Back in 2004, when the taxpayer capitalized the roof repair no error was made. The taxpayer, based on all information on hand, made an election to capitalize the expense. To change 2004 and 2005, he needs the commissioner's approval for a change in method.

-- Alan