My client has a rental property. She spent $51,000 repointing the bricks. In theory, Is repointing a repair or an improvement? Nornally I would tend to be conservative here and depreciate, just to reduce audit risk, but my client wants to deduct if possible.
-
-
I used to lay brick years ago. From a bricklayers standpoint pointing up mortar joints does not improve the structual integrity of the wall. It does improve the looks of the wall though if the joints were flaking or popping out. I would vote for repair in this instance unless in addition to pointing up the joints they were replacing bricks also. $51,000 sounds like an awful lot of money to just point up joints. -
I agree with newtotaxbooks. Deduct as repair if the loss it creates will be allowed as a deduction, otherwise capitalize and depreciate.Comment
-
There is a new repair allowance method for deducting a portion of what otherwise would be considered an improvement, explained in TTB, page 7-6.
For example, say your basis in the rental property was $200,000 prior to the brick repair. If you count the brick repair as an improvement (added to basis), the basis of the rental property after the repair is $251,000.
Under the repair allowance method, the repair allowance percentage for residential rental property is 1.82%. The average unadjusted basis is $200,000 + $251,000 = $451,000 รท 2 = $225,500. The repair allowance amount is $225,500 X 1.82% = $4,104. Because the repair cost ($51,000) exceeds the repair allowance amount ($4,104), you can claim $4,104 as a current deduction and capitalize the rest. The capitalized amount is depreciated as an improvement over 27.5 years.
The advantage of making this election is that it is irrelevant whether or not the IRS would rule this as an improvement during an audit. Even if it is an improvement and not a repair, you still get to deduct the repair allowance amount as a current deduction. It is a safe way of taking some of the expense as a current deduction without risking having the IRS reclassify your repair as an improvement during an audit.Comment
-
Gees Bees... the tax savings with 1.82% is hardly worth the time to calculate. I expect that in most cases I would rather fully deduct as repairs and argue with the IRS agent later. This is obviously a method dreamed up by the IRS to favor the IRS and a method the taxpayer could agree with on audit if he wanted to settle. So only if there were other issues to be concerned about on the tax return would anyone want to do it when first filing. Gees.. the next thing the IRS will come up with may be to only deduct a portion of your office rent since you sit there day-dreaming part of your day.Comment
-
Repair Allowance
Bees, I read TTB upon your suggestion. The really bad news is all repairs and improvements must be done on this method forever on this property and if I am reading it correctly all otehr rental properties they own. So you could have interior painting one year for $10,000 and have to capitalize it even though it is clearly a repair. Thanks for pointing this out to me but it does not look like a way to go.Comment
-
If it doesn't fit the definition of an improvement, then expense.Dave, EAComment
-
I agree it is a dumb regulation...for now. Maybe if IRS would up the percentages so that you would be expensing say 25% of your rental property costs per year, then maybe more people would bite.
IRS offered this reg only after they started to lose some tax court cases on the repair vs improvement issue.Comment
Comment