Hiring a professional property manager makes a lot of sense, especially during the chilly months of the year when pipes have the best chance of bursting, gutters and downspouts always seem to need cleaning and roofs tend to develop leaks.
That’s because rulings by the tax courts have given a lot of leeway to landlords for deductible roof replacement as long as they can show they would no longer be able to rent the home if the roof leaked. This potential deduction is not available for a taxpayer’s primary residence.
For example, a Long Beach, California, woman rented a single-family home to a tenant for four years. The tenant began to complain that the roof was leaking and that the moisture was seeping into the home’s bedrooms. The woman, a widow who desperately needed the rental income to help pay her monthly living expenses, hired a contractor who removed the top layers of the roof and covered it with fiberglass sheets and hot asphalt. The contractor also replaced some interior drywall and made other interior repairs.
The widow then deducted the cost of the new roof’s labor and material, including the interior repairs, on her federal income taxes. However, the Internal Revenue Service disallowed the expense and indicated the roof costs would have to be “capitalized” over 27.5 years – roughly the expected life of the roof. In a capsule, repairs are deductible in the year they are made while capital improvements must be spread over time.
The tax court countered the IRS ruling and expanded the scope of “incidental repairs.” The court held that a taxpayer was entitled to deduct the cost of removing and replacing the roof-covering material on a rental house because the only purpose in having the work done was to keep the rental house in operating condition.
“The court really pointed to the purpose of why the work was done,” said Rob Keasal, partner in the accounting firm of Peterson Sullivan LLP. “According to the court, the woman’s only purpose in having the old roof removed and a new one put on was to prevent the leakage and to keep her rental house in operating condition. That’s why the entire cost of the removal and replacement of the roof was deductible in the year it was done.”
However, the tax court upheld the landlord’s claim, ruling her costs only provided her “a roof free of leaks.” The court ruled the landlord’s intent was not to increase the building’s value, change its use or prolong its life.
Local journalism is essential.
Give directly to The Spokesman-Review's Northwest Passages community forums series -- which helps to offset the costs of several reporter and editor positions at the newspaper -- by using the easy options below. Gifts processed in this system are not tax deductible, but are predominately used to help meet the local financial requirements needed to receive national matching-grant funds.
Subscribe to the Coronavirus newsletter
Get the day’s latest Coronavirus news delivered to your inbox by subscribing to our newsletter.