Hiring a professional property manager for your rental property 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.
However, consumers with just one or two rental properties often cannot justify the costs of a property manager and they remain “on call” for emergency calls from tenants. If you are a rental property owner looking for a tax deduction, you might want to consider doing that needed roof repair/replacement now.
That’s because recent 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 recovered 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 – approximately 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 when 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 Seattle accounting office of BDO USA 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.”
In another case involving a commercial property, a landlord spent $52,880 to repair a warehouse roof that sheltered several corporations’ items, including one company’s expensive Christmas ornaments. According to the roof inspector, one area of the building was leaking “almost like a river” yet much of the roof appeared to be in fair shape. The roofing contractor, however, said it was company policy to remove and replace the entire roof when a large section was in need of repair. The roofing company did not want to leave itself open to legal challenges if the roof still leaked – perhaps from another location – after a repair/patch job.
During the complete roof project, 28 sheets of plywood on the roof were replaced because of dry rot. Because the leaks were found under the rooftop air conditioning unit, contractors had to move and replace the air conditioner with a crane, place supports under the air conditioner when it was replaced, disconnect and reconnect the gas lines and install new electrical conduits, according to tax court documents.
The IRS would not accept the $52,880 deduction as a repair, saying the job was really a new roof and should be capitalized as a major improvement. It said the landlord only was due a $656 depreciation deduction.
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.
It’s a good time to consider doing more than less to a rental property’s roof. And, the tax court will probably be on your side.
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