In reply to the original post, dated 2/17/2007 (which I cannot cut and paste in because the hyperlink messes things up), regarding the proper treatment (expensing vs capitalizing and depreciating) of replacing a roof by removing all of the old shingles and installing new shingles. Just to add some further confusion to the mix, and having due regard for the other replies, the following: If the house was still in operating condition when the shingles were replaced, provided that none of the other roofing components were replaced, you have an argument that replacement of the shingles constituted merely a repair to keep the house in operating condition, and therefore was a deductible expense rather than a capital cost. On the other hand, if the house was not in operating condition prior to replacement of the shingles, then the Service has a good argument that it was a capital cost rather than a repair expense. As stated by the Tax Court in Schroeder v. CIR, TC Memo
1996-336: "Amounts expended for ordinary and necessary incidental repairs and maintenance may be deducted by a cash basis taxpayer when paid, while amounts incurred to permanently improve property or increase its value must be capitalized and depreciated over the useful life of the improvement." Further, quoting the Ninth Circuit: "The Court of Appeals for the Ninth Circuit has summarized the difference as: 'The often-litigated distinction between repair expenses and capital improvements has been characterized as the difference between "keeping" and "putting" a capital asset in good condition: The test which normally is to be applied is that if the improvements were made to "put" the particular capital asset in efficient operating condition, then they are capital in nature. If, however, they were made merely to "keep" the asset in efficient operating condition, then they are repairs and are deductible. [quoting Moss v. Commissioner, 831 F.2d 833 (9th Cir., 1987)]'" In Schroeder, the Tax Court held that replacement of "four or five of the approximately 126 tin roof sections" on the roof of a large barn was a deductible repair expense and not a capital cost. Conversely, there is the holding in Oberman v. CIR, 47 TC 471 (1967), which has been referred to in earlier replies. In Oberman, the Tax Court held with respect to the roof of a commercial building, that the removal of the asphalt, gravel, and perlite (leaving the basic steel decking intact), the insertion of a wood-framed copper-covered roof expansion joint running the length of the building, and the covering of the whole with a layer of 1/2-inch fiberboard insulation and a 20-year, 4-ply asphalt and gravel top constituted a deductible repair and not a capital cost. The Tax Court's rationale was: "We think that the expenditure in question should properly be considered as a deductible ordinary and necessary business expense rather than a capital expenditure. The testimony establishes that the petitioner's only purpose in having the work done to the roof was to prevent the leakage and thus keep the leased property in an operating condition over its probable useful life for the uses for which it was acquired, and not to prolong the life of such property, increase its value, or make it adaptable to a different use. There was no replacement or substitution of the roof. It is true that the work included some structural change, namely, the insertion of an expansion joint in the roof. However, the evidence establishes that was the most economical way to repair the leaks and thus keep the leased property in an ordinarily efficient operating condition. Nor in our opinion did [pg. 483]the work materially add to the value of the property, within the meaning of the regulations. As we stated in Plainfield-Union Water Co., supra, any properly performed repair adds value as compared with the situation existing immediately prior to the repair, but the proper test is whether the expenditure materially enhances the value, use, life expectancy, strength, or capacity as compared with the status of the asset prior to the condition necessitating the expenditure. When the petitioner leased the property the roof was free of leaks and so continued for 2 or 3 years. The expenditure which the petitioner made merely restored it to that condition." The Tax Court also quoted from Illinois Merchants Trust Co., Executor, 4 B.T.A. 103: "In determining whether an expenditure is a capital one or is chargeable against operating income, it is necessary to bear in mind the purpose for which the expenditure was made. To repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use. The one is a maintenance charge, while the others are additions to capital investment which should not be applied against current earnings."[Quoting from Illinois Merchants Trust Co., Executor, 4 B.T.A. 103.] As a first matter, it strikes me that the Oberman case was wrongly decided. The taxpayer in that case scrapped one type of roof covering, and replaced it with a significantly superior form of roof covering. While the Tax Court did not state what the expected remaining useful life of the old roof covering was, it did state that the new covering had an expected useful life of 20 years. As a result, it would appear to be the case that the taxpayer in Oberman replaced an inferior type of roof covering with a superior type, and should therefore have had to capitalize the costs instead of being allowed to deduct them as repair costs. See, e.g., Stark v. CIR, TC Memo 1999-1, in which the Tax Court held that a taxpayer who "repaired" a swing-type gate damaged by a truck with a slide-type gate that was an improvement over the old gate had made a capital expenditure rather than a deductible repair. However, it would appear to be the case that what lay at the bottom of the Tax Court's holding in Oberman was that it accepted the taxpayer's argument that it only intended to repair the leaks, and that replacing the old roof covering with the new was the only way to repair those leaks. Thus, whereas the taxpayer in Stark could have simply replaced the old swing-type gate with an identical model instead of with the new slide-type gate, which resulted in a capital expenditure rather than a repair cost, the taxpayer in Oberman apparently could not have achieved the required repair simply by replacing the old roof covering with another version of the same covering material; instead, it had to scrap an otherwise perfectly useful roof and replace it with the superior new roof covering in order to achieve the only end it desired - fixing the leaks. Implicit in this argument is the proposition that the old roof covering did not otherwise require replacement (i.e., it still have a useful life remaining) and would have served satisfactorily had the leaks been capable of repair short of replacement with the new roof covering. So, to take all of this material and try to distill it down into a rule that we can try to apply to your facts, replacement of all the shingles on a roof may constitute a deductible repair rather than a capitalized replacement cost if (1) the sole intention, as demonstrated by objective facts, was to repair the leaks, (2) the old shingles were otherwise still in decent shape and had a remaining expected useful life, and (3) replacement of all of the shingles was the only way to achieve the sole intended end of repairing the leaks. In your case, you haven't told us what the general state of repair was of the shingles you replaced, nor what the "other issues" were. You also haven't told us whether or not there were other less drastic means for achieving the goal of repairing the leaks. Finally, you haven't told us whether you replaced the shingles in order to add value to the property or to otherwise upgrade it (e.g., to make it more appealing to a wealthier class of tenants, which would constitute a capital improvement). Finally, I would point out that the Oberman case is (a) old, (b) in the distinct minority, most cases involving roof replacements, as opposed to replacement of a few individual shingles, coming out the other way (although those cases rarely describe whether the work consisted only of shingle replacement, or also involved more structural work), and (c) involved a commercial building with a design in which the covering of the roof is much less integral to the structure of the roof itself (e.g., without the covering the roof would continue to function, albeit with leaks; in your case, without the shingles, the underlying wood structure would quickly begin to rot, making the house uninhabitable). Unless the shingles you replaced still had a significant amount of useful life left, you replaced all of them solely to fix the leaks, and replacement of all of the shingles was the only economically feasible way of repairing the leaks, I would be inclined to regard the cost as a capital expenditure and not a deductible repair expense. That being said, you really should consult with an experienced CPA who has a lot of experience dealing with residential rental properties. She or he is much more likely to have a better idea as to whether, in practice, and based on all of the facts and circumstances, including the ones you haven't given us, the IRS would be more likely to regard replacement of the shingles as a repair or a capital expenditure.
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