Repair or Improvement

[Kram BergGold]

Client owns and lives in a 2 Family. She lives in 60% and rents out 40%. In 2016 she spent $28,000 fixing the exterior of the house, due to the damage caused by squirrels. The $11,200 of work attributable to the rental section, can it be argued that it is a repair due to the damage caused by the squirrels or does it have to be depreciated over 27.5 years. None of the new safe harbors will work in this situation? Let me add, the client is only in the 15% bracket but is desperate to reduce her balance due.

[ATSMAN]

I would consider it restoration and capitalize.

I have had re siding job on my own property after wood rot.

[taxea]

It depends on whether like materials were used which would make it repairs vs upgraded materials used which could make it an improvement and whether the materials used are not considered a permanent part of the building such as a whole house air-conditioner/duct heater or replacement windows. Another way to put it would be if the items were of the kind that normal maintenance/upkeep then it would be repairs. If it raises the value of the house it is an improvement. You may have some of both so the rental repairs and improvements would have to be allocated as such. The TP residence repairs/maintenance is not deductible and the allocated improvements portion would be added to the basis of the TP portion of the building.

[ttbtaxes]

Did the taxpayer file a claim with the insurance company?

I would think it would be a restoration under Reg 1.263(a)-(3)(k)(1) and thus capitalized. You can also look at Example 6 in Reg 1.263(a)-(3)(k)(7) where a building fell into disrepair and they had to shore up the walls and replace siding and that was a restoration and capitalized.

[ATSMAN]

Did the taxpayer file a claim with the insurance company?

I would think it would be a restoration under Reg 1.263(a)-(3)(k)(1) and thus capitalized. You can also look at Example 6 in Reg 1.263(a)-(3)(k)(7) where a building fell into disrepair and they had to shore up the walls and replace siding and that was a restoration and capitalized.

BINGO! This question comes up very frequently regarding a complete siding job because old siding "just went bad over time". That example answers the question so that is how I answer that question from my clients.

[JON]

Hurricane

Is there a difference between not insured hurricane damage and this??

[Rapid Robert]

I'm on the side of repair, but I think more questions need to be asked and answered.

For a restoration in this case, I'd ask, did the building fall so far into disrepair that it no longer functioned as a rental?

For a betterment, did it correct a problem in existence prior to acquisition?

There's more to it than that, of course, but I have collected enough TPR flowcharts to know that it takes more analysis than just finding one vaguely similar example in the regs to come up with a final answer.

[mactoolsix]

Kram,
Have you considered a Partial Asset Disposition. Sounds like the siding (or what ever the squirrels liked) was destroyed well before its time. You probably have a deducible loss.

I know many don't like PAD because it is a bit more difficult to calculate. If you need help, I can send you a spreadsheet that will calculate the PAD for you - pm me your email. If you send the particulars -
Cost of materials & Labor,
original date of the house & purchase date (or PIS date),
date of replacement,
accumulated depreciation of the building,
building unadjusted cost.

I'll fill in the spreadsheet and send it to you,
Mike