A tenant was renting an apartment and paying rent. As part of the deal, tenant paid electric and water bills. For 6 months, tenant only paid two months of rent and did not pay any of the electric or water bill. Tenant is now gone. I have to pay all of the past due electric and water bills plus the water and electric bills for the rest of the year assuming I don't get a new tenant until January.
Are all of the expenses for water and electric deductible on Sched E or is there some limitation?
Absolutely. In general, legitimate expenses for a bona fide rental property fall into two categories. Purchases that must be capitalized, such as a new $500 fridge or $6000 roof, vs expenses that get written off each year on Sch E, such as utilities, or normal repairs. In this case, any utilities attributable to the apartment can be claimed.
But beware the passive activity loss limitation, which may "suspend" taking a deduction for any tax losses from a rental activity until the next year.
Roofs are expensed, not capitalized, unless there is a lot of structural work as well.
I disagree. Certainly under the "new" capitalization rules, and probably under the old rules, roof _replacement_ is capitalized. Roof _repairs_ are, well, REPAIRS, and so are expensed.
-- Arthur Rubin, AFSP, CRTP, Brea, CA
Well, you are wrong. Under the pre-"new rules", the IRS lost several court cases that said a roof replacement (of the "membrane", not more extensive structural work) was a REPAIR, not an improvement, and thus need not be capitalized.
The IRS mentioned this specifically in their comments to the new rules, which makes sense, as the IRS cannot promulgate rules contrary to statutory law. Interestingly, the IRS did NOT comment on the general principal explained by the court holdings other than as applies to roofs, so expect more litigation down the road.
But no litigation is needed with referent to roof (membrane) replacements - they are expensable repairs.
Can you give the regulation number of the rules or names and/or citations for the court cases you say the IRS lost? Because what you have stated is contrary to the IRS position in Publication 527 (2016):
Under statutory law something that adds to or extends the life of a building is a capital expense, not a "repair." Under IRC ?263, a capital expense is "Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." If it's a capital improvement it is not a deductibel repair, and has to be depreciated.
Unless you can demonstrate some legal authority, all the authority I have been able to find indicates that you are incorrect.
The following article mentions several cases:
I have done so before right here. Replacing the roof membrane is not a betterment.
All of the cases I am aware of (THOMAS J. NORTHEN, JR., AND SHIRLEY COX, Petitioners v. Comm'r and Oberman Manufacturing Co. v. Comm'r), in Tax Court that allowed the "replacement" to be expensed dealt with the intent to stop leaks. I believe that a rental or business property owner that decides to replace a roof because it has reached end of life and is concerned about the future could not expense the cost.
If you are talking only about the membrane, then you're half right. The IRS position on this is,
"For example, while the replacement of a roof membrane with a comparable new roof membrane is generally not a material betterment of the building structure, the replacement of a roof membrane with a new membrane made of materials designed to materially increase the strength and efficiency of the roof should result in a betterment to the entire building structure."
Well, you are wrong. Under the pre-"new rules", the IRS lost several court cases that said a roof replacement (of the "membrane", not more extensive structural work) was a REPAIR, not an improvement, and thus need not be capitalized.
The IRS mentioned this specifically in their comments to the new rules, which makes sense, as the IRS cannot promulgate rules contrary to statutory law. Interestingly, the IRS did NOT comment on the general principal explained by the court holdings other than as applies to roofs, so expect more litigation down the road.
But no litigation is needed with referent to roof (membrane) replacements - they are expensable repairs. ============ The court cases where the repair treatment was allowed are where the taxpayer basically paved over the old roof with a new roof. Cases where capital treatment was allowed where where the taxpayer removed the prior roofing materials before putting on the new roof.
This is per my memory from about 2006 - the last time I needed a new roof on a house. As a substantial capital component, the new capitalization vs. expensing rules since then haven't really changed roof treatment, but certainly can apply to other real estate components.....
What the IRS says doesn't count when the U.S. Tax Court has spoken on the matter.
That is not my recollection.
Yes, it is interesting that the IRS focused on the word "roof" rather than the general principals ruled upon in the court cases. This will lead to further litigation regarding the new IRS rules. Why, for example, is a sewer line different than a roof?
That is not the position the IRS takes. I don't understand how the IRS can simply decide not to follow the law whenever it feels like it.
The IRS doesn't just ignore court decisions. Every tax court case arises from one of the 13 federal court districts. If the IRS disagrees with a case, they may appeal. But if they don't, they may decide to "nonacquiesce." In that case they will follow the court decision in that federal district, but not others, until ordered to do so. Once they lose in two or more federal districts, they will generally change their mind, but sometimes it takes going to the Supreme Court before they will follow a decision everywhere.
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