New Roof Cost over $11000

[equinecpa]

Ok I have a client who replaced a roof on their rental property (single family dwelling) this year, with cost in excess of $10000.

I believe he must capitalize and depreciate over 27.5 years.

I'm stuck on the old roof-can he take a deduction for that? If he has never replaced the roof prior to this, how does one compute the cost of the disposition? I've seen reference to CPI but not sure what to apply that to?

Are there any elections that need to be filed to claim the deduction for the old roof?

Thanks

Carolyn

[joanmcq]

If he does a partial disposition, he has to capitalize. And if you read the new regs, the UOP pretty much says an entire new roof is capitalized anyways. BTW, 11k isn't that much. My new roof was over 17k.

[taxea]

I read the new regs and my take is that if the roof was replaced with like-kind materials it is a repair/replacement totally expenses. If it is an upgrade in the type of materials then it is capitalized.

[ttbtaxes]

It constitutes a restoration and must be capitalized. The regulations provide an example. Look at Example 14 in Reg. 1.263(a)-3(k)(7):

Example 14. Replacement of major component or substantial structural part; roof. K owns a manufacturing building. K discovers several leaks in the roof of the building and hires a contractor to inspect and fix the roof. The contractor discovers that a major portion of the decking has rotted and recommends the replacement of the entire roof. K pays the contractor to replace the entire roof, including the decking, insulation, asphalt, and various coatings. Under paragraphs (e)(2)(ii) and (k)(2) of this section, an amount is paid to improve a building if the amount is paid to restore the building structure or any building system. The roof is part of the building structure as defined under paragraph (e)(2)(ii)(A) of this section. Because the entire roof performs a discrete and critical function in the building structure, the roof comprises a major component of the building structure under paragraph (k)(6)(ii)(A) of this section. In addition, because the roof comprises a large portion of the physical structure of the building structure, the roof comprises a substantial structural part of the building structure under paragraph (k)(6)(ii)(B) of this section. Therefore, under either analysis, K must treat the amount paid to replace the roof as a restoration of the building under paragraphs (k)(1)(vi) and (k)(2) of this section and must capitalize the amount paid as an improvement under paragraph (d)(2) of this section.

[ttbtaxes]

I'd also be interested in seeing an example of the calculation of the partial disposition using the CPI index if someone could provide a link to one.

Edited to include an example:

I think the CPI method is fairly straight forward. You take the cost of the replacement and multiply it times a fraction the numerator is the PPI in the month of acquisition and the denominator is the PPI in month of disposition. For example, a building was purchased in April 1989 and a new roof was put on in June 2008 at a cost of $100,000. The rollback would be calculated as follows:

$100,000 x 113.0 (April 1989 PPI) /182.4 (June 2008 PPI) = $61,952. You would then calculate accumulated depreciation from April 1989 through June 2008 (assume 39 yrs for my example) $61,952/39 x 18.167 = $28,858. The loss then would be $61,952 - $28,858 = $33,094.

I sure hope someone corrects me if I am wrong.

[ATSMAN]

It constitutes a restoration and must be capitalized. The regulations provide an example. Look at Example 14 in Reg. 1.263(a)-3(k)(7):

Example 14. Replacement of major component or substantial structural part; roof. K owns a manufacturing building. K discovers several leaks in the roof of the building and hires a contractor to inspect and fix the roof. The contractor discovers that a major portion of the decking has rotted and recommends the replacement of the entire roof. K pays the contractor to replace the entire roof, including the decking, insulation, asphalt, and various coatings. Under paragraphs (e)(2)(ii) and (k)(2) of this section, an amount is paid to improve a building if the amount is paid to restore the building structure or any building system. The roof is part of the building structure as defined under paragraph (e)(2)(ii)(A) of this section. Because the entire roof performs a discrete and critical function in the building structure, the roof comprises a major component of the building structure under paragraph (k)(6)(ii)(A) of this section. In addition, because the roof comprises a large portion of the physical structure of the building structure, the roof comprises a substantial structural part of the building structure under paragraph (k)(6)(ii)(B) of this section. Therefore, under either analysis, K must treat the amount paid to replace the roof as a restoration of the building under paragraphs (k)(1)(vi) and (k)(2) of this section and must capitalize the amount paid as an improvement under paragraph (d)(2) of this section.

I always found this example somewhat confusing for the average residential rental where most of the times the only component is replaced or added is the singles. In our county you can go 2 layers of shingles so many landlords just install an extra layer on top of the worn out layer, replacing badly worn shingles in spots. In my opinion that is a repair because it did not replace all the structural components mentioned in the example (decking, insulation, drip edges etc.).

[ttbtaxes]

There is an example in the regs where a new rubber membrane is replaced and it is considered a repair. Example 13 in Reg. 1.263(a)-3(j)(3)

[Snaggletooth]

What Time Period

I agree this should be capitalized, but would like to revert to the original post and ask what time period should be depreciated.

Most contractors tell me a roof cannot be expected to last more than 20 years.

[ttbtaxes]

I agree this should be capitalized, but would like to revert to the original post and ask what time period should be depreciated.

Most contractors tell me a roof cannot be expected to last more than 20 years.

Since it is residential rental it has to be 27.5 years.

[TXEA]

First question....Did he replace the whole roof or just the shingles?

Second question.....What caused the need for replacement?

Example 11 - TPR's

Example 11: The taxpayer replaces wood shingles on a roof because of storm damage. The appropriate comparison is the building structure before and after the replacement. The roof was functioning properly before the storm. If the shingles are replaced with similar wood shingles, the replacement is not considered a betterment. If the same type of wood shingles are no longer available and the shingles are replaced with asphalt shingles of the same quality, the replacement still is not a betterment. However, if the new shingles are of greater quality (e.g., they have a longer warranty period) the replacement is a betterment, and the costs must be capitalized.49

So, if the replacement was due to extended wear and tear over a long period of time.....capitalize at 27.5 years for residential.

If it was due to damage and the shingles are of like quality to the old, expense.

If he replace the whole roof, capitalize over 27.5 for residential.

[TAX4US]

I have one where storm blew off half of shingles. TP could not get matching color to put back on. Ins paid for half. I think I will expense rest. Would you agree?

[ATSMAN]

I have one where storm blew off half of shingles. TP could not get matching color to put back on. Ins paid for half. I think I will expense rest. Would you agree?

Yes Sir, Repair and Expense!
I can't find matching color either so I had to settle for brown wood, but I can tell the difference in shades!

[TXEA]

I have one where storm blew off half of shingles. TP could not get matching color to put back on. Ins paid for half. I think I will expense rest. Would you agree?

Repairs and Maintenance

[TaxGuyBill]

I'm stuck on the old roof-can he take a deduction for that? If he has never replaced the roof prior to this, how does one compute the cost of the disposition? I've seen reference to CPI but not sure what to apply that to?

The Final Regulations changed it to the Producer Price Index (PPI) for Finished Goods (and its successor, the Producer Price Index for Final Demand). I THINK this is the right link, then click the box for "Finished goods - WPUSOP3000".

http://data.bls.gov/cgi-bin/surveymost?wp

***This is how I interpret things. I have NOT looked deeply into it, so I could be wrong. See also my edited comment on the bottom.***

Let's say the Rental House was bought and placed into service in January 2005 (you can change the years near the top) and replaced the roof in January 2014. The number for January 2005 is 151.4, and the number for January 2014 is 198.0. You divide 151.4 by 198.0 and get 76.46%.

Now let's say the new roof costs $10,000. Using the PPI, the roof hypothetically cost $7,646 in January 2005 ($10,000 x 76.46%).

Let's also say you paid $100,000 for the house (not including land) in January 2005. Of that amount, we just determined $7,646 of that is for the roof.

Now you take your $100,000 asset and divide it into two assets. The house asset would be $92,354, and the old roof asset would be $7646. You also divide the prior depreciation between the two assets.

You now "dispose" of the old roof, resulting in a loss of the undepreciated amount of the roof.


Does that make sense?


EDIT: I should clarify that I think that is what you do if you the OLD asset was "placed in service" when it was brand-new. In my mind, this doesn't make sense if it was 'used' when it was "placed in service". In the example above, let's say you bought and starting renting the house a month before you replaced the roof. It doesn't make sense that you would get an immediate $10,000 deduction a month later. But again, I have NOT looked deeply into this yet. Maybe later this week I'll investigate it a bit more.

[ttbtaxes]

There is a similar thread on taxprotalk and one of the real experts in this said area that the PPI method would not be allowable because the new roof would constitute a betterment. That would preclude the use of the PPI method which is only allowed with restorations.

My posts above are not correct.