Rental property - expenses vs capitalization

[oceanlovin'ea]

This is a piece of rental property.....a mobile home that was inherited. Renter destroyed inside of mobile home. She had dogs that she didn't take outside. Taxpayer had to do extensive repairs to mobile home before he could put another renter in there.
He has given me a stack of Home Depot and Lowe's receipts for the work he did. He did the work himself so this is just the supplies. It is hard for me to determine what some of the receipts are for since I am not an expert on home repairs. I do know that he laid new flooring, replaced bathroom fixtures, had to replace some of the drywall and a host of small things like new handles on cabinets. Many times he went into HD and bought stuff for several different projects on one ticket.
How would you handle this? He was not making it new. He was restoring to former condition and making it usable again.
These new regs are very confusing. Partially because a business and rental property are different situations.

Thanks

Linda EA

[ATSMAN]

>> He has given me a stack of Home Depot and Lowe's receipts for the work he did.

This is a red flag in my opinion. I would throw the receipts back at him and have it organized for what repair/replacement they pertain to and document the nature and scope of work. These HD and Lowes receipts generally have multiple items and the description does not tell you anything except that the receipt holder purchased those items.

Many years back I learned from an audit experience that if you neglect that it will come to bite you. Your client will throw you under the bus because his position will be i gave you all the receipts you should have filed it correctly!

Having said all this if the interior was basically gutted and totally replaced I would capitalize it.

[oceanlovin'ea]

That is part of the issue. When he went to HD or Lowes, he bought some cement, nails, a couple of sheets of plywood, some elbows, etc. The tickets add up to $40 to $150.00. But it is all part of fixing up the place so it is livable. We are in Central Florida. This is a poor place to live. Some of these mobile homes are not much of anything but somebody will live in them. Just facts of life here. So it seems so ridiculous to capitalize these things for 39 1/2 years. The mobile home won't last that long. And most likely all this that he is doing will have to be replaced in a couple of years because the quality of renters for this kind of property usually doesn't take care of where they live.

Linda, EA

[Gretel]

My 2 cents: First, depreciation period is 27.5 years. As you said, the repairs were done to bring the trailer back to a livable condition. This is a restoration that needs to be capitalized under the new rules. Even under the old rules, any small repairs that otherwise would qualify as repairs, need to be capitalized if done at the same time as the "remodel". No need to try to differentiate on receipts. Have him write "Remodel" or "fix up" or whatever on each receipt and total them and be done with it.

[oceanlovin'ea]

i found a receipt for a refrigerator, microwave and stove. So those I can depreciate those for 7 years. That will help a little bit. He won't be very happy but that is the new laws.

Thanks.

Linda, EA

[TaxGuyBill]

The appliances qualify for 5 years, plus the 50% special depreciation allowance.

http://mcgladrey.com/content/dam/mcgladrey/pdf_download/tars_flowchart_capitalize_improvement.pdf

http://www.kbkg.com/handouts/KBKG-repairs-decision-tree.pdf

[oceanlovin'ea]

that's right.

That's right. The appliances do. That will help a little bit. My brain is fuzzy today. Don't want to be working.

Linda, EA

[Roland Slugg]

You didn't give us an estimate of the amount spent, but I would speculate that it wasn't an especially high total. I'm guessing $10,000 or less. Regardless, however, I would lean strongly toward expensing everything except the specific appliances that can be individually identified (and depreciated over 5 years). Based on my reading of the OP I don't believe the expenditures fall under any of the six enumerated capitalization requirements for "restorations" under the new Regs 1.263(a)-3(k). Nevertheless, I would recommend that you read those new Regs, and that one in particular, them make your decision.

Regarding the documentation your client has furnished you, it sounds like you have sorted through and classified everything adequately, so I wouldn't give them back to the client and ask him to do a better job.

[TAXNJ]

Ocean

That's right. The appliances do. That will help a little bit. My brain is fuzzy today. Don't want to be working.

Linda, EA

It's tough working by the ocean makes the brain fuzzy.

Agree with Roland Slugg to review the regs.

[Lion]

Maybe have your client read over your lists/spreadsheets/whatever your organizational method and sign that he agrees with your categorization.

Is he making the election that lets him expense $500? If so, are any of the items $500 or less?

Do read the regs and use your favorite decision tree of the many available out there to step through the questions. You have things like less than $10,000 or 2% of unadjusted basis, Betterment, Improvement, Units of Property, and lots of new definitions. But, from what you've said, I don't think you'll have to depreciate very much (unless your client wants to).

[taxea]

I, too, agree with Roland, except for the appliances it all sounds like repair/replace/maintenance to me. I would expense it all if he used "same grade" materials rather than upgraded materials. i.e. flooring was same type of material rather than an upgraded premium flooring etc.

[ATSMAN]

Here is my concern.

1) The property was in such a state of disrepair that it can not be rented out (hence all these expenses)

2) The repairs are not minor.

3) The extent of the work done looks more like restoration

If we agree that it is leaning more towards restoration of the property to be able to rent it out, shouldn't it be capitalization?

Where am I going wrong?

[oceanlovin'ea]

more details

Here are more details:
1. he spent about $4000.00 in all. He did all the work himself so it took him a while as he has a full time job. He had to replace kitchen cabinets (dog peed on the bottom cabinets).This also means new counter top and backsplash. Leak in bathtub so had to replace it and fix plumbing. Replaced tile in bathroom. Replaced vanity and toilet too. Repaired all doors or replaced. put a vinyl flooring down that is waterproof. Not more expensive, just more practical. There was no upgrading the property, just making it functional and livable.

2. many of the receipts contain an assortment of items on them. he would buy screws and cement and tile and door pulls and sheetrock or paneling on the same ticket. I'm not going to separate all of that.

3. I will depreciate the appliances each separately. I added the rest up and will depreciate it over 27.5 years. All of this stuff is attached to the trailer so I think it has to be done that way. I do think the flooring could be separated out if I knew where it is on the receipts.

I am calling him today to come and pick it up on Friday. Thanks for all your help.

BTW, taxnj, I live in the middle of the state. It is lack of the ocean that makes my thinking fuzzy. Going to beach in a couple of weeks. Need to clear my head. Lol.

Linda, EA

[Roland Slugg]

Based on your added information, I would not consider capitalizing anything except the specific new appliances, which are depreciable over 5-years. Everything else qualifies as repairs, IMO, and is deductible.

Did you read the new Regs as suggested above? I believe they clearly indicate the expenditures you described are deductible and don't need ... and should not be ... capitalized.

[Gretel]

Based on your added information, I would not consider capitalizing anything except the specific new appliances, which are depreciable over 5-years. Everything else qualifies as repairs, IMO, and is deductible.

Did you read the new Regs as suggested above? I believe they clearly indicate the expenditures you described are deductible and don't need ... and should not be ... capitalized.

Maybe, maybe not. What we do not know is how much as a % was done. IRS examples base emphasis on 50%. The dollar amount doesn't tell us much. You can get cheap and used materials and maybe for $8,000 in cheap materials the whole thing could be done.

Roland, do you by any chance know if the old rule that if you do repairs along with improvements, then all these repairs need to be capitalized, is still valid?