Rental Expenses

snipped-for-privacy@panix.com (Dick Adams) posted:

The key word is "repair," Dick. If an existing item is being fixed, it's expense. If a new item is being added, it's capitalized.

Grey area involves upgrades. You can replace an AC/Heat Pump that's failed, but what if the replacement includes a programmable thermostat, and 2-speed motor (more efficient)? That may depend on supplier invoice

-- e.g., "Repair AC" -- $000, as opposed to "Install new AC" -- $000. Obviously, the owner may influence this per agreement with vendor -- and likely that is common.

The second issue is total cost, as you suggest in your question: "how significant can these expenses be?" One example: A rental unit, which "repairs" carpeting at a cost of $6,000 appears suspiciously like an _improvement_, and probably should be capitalized. (On the other hand, a $600 "repair" would likely slide with no questions raised.)

This is an endless question. Perhaps you meant this as a Christmas present?

Bill

The basic rule, as I've always understood it is: Repairs - RESTORE value or life Improvements - EXTEND life or ADD value I'll admit it is not always easy to make this distinction and you can make arguments either way for many expenditures. But, if you keep this rule in mind, you should be able to decide.

Lanny K Williams, CPA Nawarat, Williamd & Co., Ltd. Income Tax Services for Expatriate Americans

a good rule of thumb, but don't you also need to consider what it is that you need to apply this rule to? In other words, is it the building or the item in the building? A new carpet would never extend the life of the building, so it should always be expensed? Likewise with an appliance? This is another area of confusion.

========================================= MODERATOR'S COMMENT: Nope - This is an incorrect rule of thumb and can easily cause confusion. Carpet, appliances, etc, are not part of building, but are items that must be depreciated.

In article , Gil Faver > Repairs - RESTORE value or life

I agree with the moderator. If the carpeting is being replaced it would be a depreciable five-year Sec 1245 asset.

However if someone burned a few cigarette holes in the carpeting, and a few small sections of carpeting replaced the burned ones, that would be expensed.

Is there a general rule of thumb to determine what is and what is not part of the building for such purposes? I think this seems to be more confusing than what is a repair vs. replacement, once one knows if the item is a "stand alone" item or part of a larger item.

"Gil Faver"

That, in itself, gives landlords and tenants reason to argue. And, I agree with you, I don't know if that test with respect to Real Property Law has much bearing on income tax issues.

Generally, any significant replacement will be an improvement because technology is getting better all the time. So in this case, I'd like allocate a portion of the replacement that is true replacement, and the balance would be an improvement. Not sure if you can do this, or how you would allocate.

That could reasonably be accomplished by having the vendor supply the figure for an alternative simple replacement with the same (old) model

-- presuming availability -- and either invoice as "repairs" + "upgrades" with two separate charges for accounting convenience ... or simply provide one bill for "repair with improvements" and separately submit a letter notice of what cost would have been to simply repair by replacing with the same model.

It is not unknown for a vendor to advise that they can repair item (X) with replacement parts at a cost of ($Y) -- but for ($Z), they could supply a new and upgraded unit (X+) ... and that information could be the basis for allocation -- either by the raw numbers or a percentage.

Bill