Rental Expense or Must I depreciate -- or both?

[Rob Fischer]

I have a rental unit that was trashed by the previous tenant -- paint was 6 years old and need a fresh coat throughout house. There were holes and stains on the linoleum and the carpet was completely trashed, stained, and disgusting.

All had to be redone in order to rerent the house. Is this expense, or must I depreciate all the work since it was all done at the same time, between renters?

I replace the ruined carpet and linoleum with laminate and tile, as it was nearly the same cost as replacing with a decent grade of carpet.

Would I expense the painting, and depreciate the floors, since I technically "upgraded" the floor - even though it had to be replaced due abnormal wear and tear by the previous tenant.

Thanks in advance for your response!

Rob

[veritas]

I would

expense the painting currently. Since you said you "upgraded" the floor I would depreciate it. New carpet would have had a much shorter life for depreciation.

[S T]

Painting Expense

As well, I would expense the painting, as that would seem to be a repair, (at least interior painting) (added text) as long as there was no remodel to interior which included repainting) exterior painting, depends.

See this link http://www.irs.gov/faqs/faq-kw151.html

The floors were not fixed and/or repaired they were replaced and/or improved. Therein seems to be the key, so depreciation.

Carpeting would be 5 years and tile/other flooring would probably be 7 years, however, some ceramic tile could be considered permanent and then might be considered at the 27.5 year rate. Cermic tile and marble is permanently affixed.

See PUB 946 for additional depreciation information.

Sandy

[Gene V]

As well, I would expense the painting, as that would seem to be a repair, (at least interior painting) exterior painting, depends.


Sandy

Sandy, Why do you say exterior painting depends?

from the IRS web site under-----

Repair expenses: Repainting your property inside or out.

[S T]

Reservation

I have a concern about the new technology of sales with texture coating and/or painting dealing with exterior of buildings, and whether or not that qualifies as painting expense or improvement.

What I have been presented with from some taxpayers, is "I painted the exterior of my property and it cost me $15,000", when a painting of stucco and eaves (wood trim) would have only been $3,000. (All dependent on the size of the home and area).

So looking at a taxpayer that has a rental property, do we expense exterior paint, stucco and eaves for $3,000, seems reasonable. What if the bill is $15,000 because a contractor came in and "stated" texture coat/painting? The client advises painting until I ask to see the bill and the description of the work. Wouldn't the texture coating actually be an improvement, even though the bill might have been portrayed as "paint". Texture Coating has a much longer life span. But at least in our "area" it is being represented as paint with a warranty of 10- 20 years, or the aggresive contractors are representing "lifetime".

The above would certainly work, I would think for someone trying to minimize their capital gain on sale of their personal residence and use that cost as an improvement. But I certainly don't want to lead someone down that path on a rental and subsequent challenge on an audit.

I have probably been reading too much on cost segregation!

Other thoughts?

Sandy

[Kram BergGold]

floors

The carpeting is 5 year property. The linoleum etc is either 5 year or 27 year. I do not believe there is a 7 year category for rental property.

[joanmcq]

I don't know about $3000 for exterior painting. I got a quote on my house and it was $10,000 and that wasn't for a stucco coat. It was because the wood trim windows etc are a pain in the butt and required a lot of prep work. I've always considered painting to be 5 year depreciation.

[veritas]

Then you

have been doing a misservice for your clients. Where did you come up with 5 years?

[Jiggers]

Painting

I don't know about $3000 for exterior painting. I got a quote on my house and it was $10,000 and that wasn't for a stucco coat. It was because the wood trim windows etc are a pain in the butt and required a lot of prep work. I've always considered painting to be 5 year depreciation.

Painting to maintain the appearance of the property, to cover normal wear and tear, is "Repairs & Maintenance", not 5-year depreciation.

Painting as part of remodeling would be considered a capital improvement subject to depreciation.

[Rob Fischer]

Thanks Everyone

for the quick replies! I appreciate it very much.

[joanmcq]

Painting for a residential rental was mentioned as 5 year property back in the 2000 CCH depreciation guide if I remember correctly, along with carpet, furnishings, appliances, etc. Of course, I've always painted when the properties were purchased as part of a rehab. Touch-up is a repair, full-on paint job (interior costing between $700-$2000) depreciated.

[veritas]

I can't believe

paint was ever 5 year property.

Carpet that is not glued down is 5 year property. Linoleum, tile, glued down carpet is 27.5 year property. Unless it can be defined as a repair that does not improve or prolong the property life.

[ED SMITH]

I think that two things need to be addressed here.

First, the carpet and flooring. It could be argued that the damage is a casualty loss caused by vandalism. The fact that it was replaced with a different material doesn't necessarily mean that it was an improvement. The floor covering was damaged and unusable due to vandalism and it had to be replaced. If it had been replaced with insulated or a radiant heat floor, that would be a definite upgrade.

Second, the paint. The length of the guarantee and the cost of the job have no bearing on whether or not it is anything but an expense. Most guarantees are worthless as 95% of the contractors entering into business are gone within 5 years. The high priced paint jobs are due to meticulous preparation and the use of high quality acrylic elastomeric paints. The good ones contain expensive additives such as titanium dioxide to prevent peeling, fading, chalking, mildew, discoloration and UV damage to the wood subsrate.

Texture coating could be another story. Although, the better ones "bridge" the cracks in stucco to keep out water and termites it is still paint, albeit a thicker paint. The 'texture' comes from the addition of sand, which some companies hype, calling it granite particles. So far, still an expense.

Now some companies are claiming that their texture coating provides insulation, which could be a considerable upgrade and make it a capital improvement. The problem here is that most of these claims are unsubstantiated by any test results and no R factors are given. (R factor is the insulating ability of a substance. A window pane has an R of 1, a wood frame sheet-rock wall 4 and pink panther 11-14.)

There is one company that makes coatings for the military for arctic use that has a tested R factor. This one would certainly be a capital improvement. So, unless the texture coating folks can come up with a meaningful insulation improvement, IMO it is still paint.

[S T]

Great Post

Ed,

This is great insight, as we have been seeing in So Calif a lot of painting contractors charging a "huge" amount of money for texture coating and offering 20-30 year warranties, as well as lifetime warranties. Difference in paint product, and whether or not the contractor writes up "Texture Coating" are huge.

I know from experience on quotes that I received on my personal home. $3,000- $5,000 with "elastomeric" as opposed to the the painter contractors that are pitching the sale with "Texture Coating" at a price tag of $12,000 - $15,000 or possibly higher. some also include the "R" factors, but as a consumer how do we really know?? As a preparer of taxes for our clients, how do we really know??

How do we practice the due diligence between expensing, or charging to an improvement?

The receipts that the customer receives, our tax client, is usually vague at best, so the contractor is never on the "hook" for a lawsuit later on.

How would a $10,000 exterior paint job that was to include texture coating stand up in audit as an expense?? When even with elastomeric paint, probably should have only been no more than $5,000. Depending on square footage of course.

Sandy

[Gretel]

I hear your concern, Sandy. It just occurred to me that the dollar amount should have no bearing if it is an expense or improvement. You have greedy professionals in all professions and people who buy the service and/or materials. I mean, for a tax return I charge a little over $200, I know another preparer charges $600. And, beg your pardon, my $200 is already on the high end in my area.