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Posted by Shyster1040 on February 22, 2007, 2:08 am
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In reply to the original post, dated 2/17/2007 (which I
cannot cut and paste in because the hyperlink messes things
up), regarding the proper treatment (expensing vs
capitalizing and depreciating) of replacing a roof by
removing all of the old shingles and installing new
shingles.
Just to add some further confusion to the mix, and having
due regard for the other replies, the following:
If the house was still in operating condition when the
shingles were replaced, provided that none of the other
roofing components were replaced, you have an argument that
replacement of the shingles constituted merely a repair to
keep the house in operating condition, and therefore was a
deductible expense rather than a capital cost.
On the other hand, if the house was not in operating
condition prior to replacement of the shingles, then the
Service has a good argument that it was a capital cost
rather than a repair expense.
As stated by the Tax Court in Schroeder v. CIR, TC Memo
1996-336: "Amounts expended for ordinary and necessary
incidental repairs and maintenance may be deducted by a cash
basis taxpayer when paid, while amounts incurred to
permanently improve property or increase its value must be
capitalized and depreciated over the useful life of the
improvement." Further, quoting the Ninth Circuit: "The
Court of Appeals for the Ninth Circuit has summarized the
difference as: 'The often-litigated distinction between
repair expenses and capital improvements has been
characterized as the difference between "keeping" and
"putting" a capital asset in good condition: The test which
normally is to be applied is that if the improvements were
made to "put" the particular capital asset in efficient
operating condition, then they are capital in nature. If,
however, they were made merely to "keep" the asset in
efficient operating condition, then they are repairs and are
deductible. [quoting Moss v. Commissioner, 831 F.2d 833 (9th
Cir., 1987)]'"
In Schroeder, the Tax Court held that replacement of "four
or five of the approximately 126 tin roof sections" on the
roof of a large barn was a deductible repair expense and not
a capital cost.
Conversely, there is the holding in Oberman v. CIR, 47 TC
471 (1967), which has been referred to in earlier replies.
In Oberman, the Tax Court held with respect to the roof of a
commercial building, that the removal of the asphalt,
gravel, and perlite (leaving the basic steel decking
intact), the insertion of a wood-framed copper-covered roof
expansion joint running the length of the building, and the
covering of the whole with a layer of 1/2-inch fiberboard
insulation and a 20-year, 4-ply asphalt and gravel top
constituted a deductible repair and not a capital cost.
The Tax Court's rationale was: "We think that the
expenditure in question should properly be considered as a
deductible ordinary and necessary business expense rather
than a capital expenditure. The testimony establishes that
the petitioner's only purpose in having the work done to the
roof was to prevent the leakage and thus keep the leased
property in an operating condition over its probable useful
life for the uses for which it was acquired, and not to
prolong the life of such property, increase its value, or
make it adaptable to a different use. There was no
replacement or substitution of the roof. It is true that the
work included some structural change, namely, the insertion
of an expansion joint in the roof. However, the evidence
establishes that was the most economical way to repair the
leaks and thus keep the leased property in an ordinarily
efficient operating condition. Nor in our opinion did [pg.
483]the work materially add to the value of the property,
within the meaning of the regulations. As we stated in
Plainfield-Union Water Co., supra, any properly performed
repair adds value as compared with the situation existing
immediately prior to the repair, but the proper test is
whether the expenditure materially enhances the value, use,
life expectancy, strength, or capacity as compared with the
status of the asset prior to the condition necessitating the
expenditure. When the petitioner leased the property the
roof was free of leaks and so continued for 2 or 3 years.
The expenditure which the petitioner made merely restored it
to that condition."
The Tax Court also quoted from Illinois Merchants Trust Co.,
Executor, 4 B.T.A. 103: "In determining whether an
expenditure is a capital one or is chargeable against
operating income, it is necessary to bear in mind the
purpose for which the expenditure was made. To repair is to
restore to a sound state or to mend, while a replacement
connotes a substitution. A repair is an expenditure for the
purpose of keeping the property in an ordinarily efficient
operating condition. It does not add to the value of the
property, nor does it appreciably prolong its life. It
merely keeps the property in an operating condition over its
probable useful life for the uses for which it was acquired.
Expenditures for that purpose are distinguishable from those
for replacements, alterations, improvements or additions
which prolong the life of the property, increase its value,
or make it adaptable to a different use. The one is a
maintenance charge, while the others are additions to
capital investment which should not be applied against
current earnings."[Quoting from Illinois Merchants Trust
Co., Executor, 4 B.T.A. 103.]
As a first matter, it strikes me that the Oberman case was
wrongly decided. The taxpayer in that case scrapped one
type of roof covering, and replaced it with a significantly
superior form of roof covering. While the Tax Court did not
state what the expected remaining useful life of the old
roof covering was, it did state that the new covering had an
expected useful life of 20 years. As a result, it would
appear to be the case that the taxpayer in Oberman replaced
an inferior type of roof covering with a superior type, and
should therefore have had to capitalize the costs instead of
being allowed to deduct them as repair costs. See, e.g.,
Stark v. CIR, TC Memo 1999-1, in which the Tax Court held
that a taxpayer who "repaired" a swing-type gate damaged by
a truck with a slide-type gate that was an improvement over
the old gate had made a capital expenditure rather than a
deductible repair.
However, it would appear to be the case that what lay at the
bottom of the Tax Court's holding in Oberman was that it
accepted the taxpayer's argument that it only intended to
repair the leaks, and that replacing the old roof covering
with the new was the only way to repair those leaks.
Thus, whereas the taxpayer in Stark could have simply
replaced the old swing-type gate with an identical model
instead of with the new slide-type gate, which resulted in a
capital expenditure rather than a repair cost, the taxpayer
in Oberman apparently could not have achieved the required
repair simply by replacing the old roof covering with
another version of the same covering material; instead, it
had to scrap an otherwise perfectly useful roof and replace
it with the superior new roof covering in order to achieve
the only end it desired - fixing the leaks.
Implicit in this argument is the proposition that the old
roof covering did not otherwise require replacement (i.e.,
it still have a useful life remaining) and would have served
satisfactorily had the leaks been capable of repair short of
replacement with the new roof covering.
So, to take all of this material and try to distill it down
into a rule that we can try to apply to your facts,
replacement of all the shingles on a roof may constitute a
deductible repair rather than a capitalized replacement cost
if (1) the sole intention, as demonstrated by objective
facts, was to repair the leaks, (2) the old shingles were
otherwise still in decent shape and had a remaining expected
useful life, and (3) replacement of all of the shingles was
the only way to achieve the sole intended end of repairing
the leaks.
In your case, you haven't told us what the general state of
repair was of the shingles you replaced, nor what the "other
issues" were. You also haven't told us whether or not there
were other less drastic means for achieving the goal of
repairing the leaks. Finally, you haven't told us whether
you replaced the shingles in order to add value to the
property or to otherwise upgrade it (e.g., to make it more
appealing to a wealthier class of tenants, which would
constitute a capital improvement).
Finally, I would point out that the Oberman case is (a) old,
(b) in the distinct minority, most cases involving roof
replacements, as opposed to replacement of a few individual
shingles, coming out the other way (although those cases
rarely describe whether the work consisted only of shingle
replacement, or also involved more structural work), and (c)
involved a commercial building with a design in which the
covering of the roof is much less integral to the structure
of the roof itself (e.g., without the covering the roof
would continue to function, albeit with leaks; in your case,
without the shingles, the underlying wood structure would
quickly begin to rot, making the house uninhabitable).
Unless the shingles you replaced still had a significant
amount of useful life left, you replaced all of them solely
to fix the leaks, and replacement of all of the shingles was
the only economically feasible way of repairing the leaks, I
would be inclined to regard the cost as a capital
expenditure and not a deductible repair expense.
That being said, you really should consult with an
experienced CPA who has a lot of experience dealing with
residential rental properties. She or he is much more
likely to have a better idea as to whether, in practice, and
based on all of the facts and circumstances, including the
ones you haven't given us, the IRS would be more likely to
regard replacement of the shingles as a repair or a capital
expenditure.
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Posted by way222 on February 27, 2007, 3:55 pm
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> In reply to the original post, dated 2/17/2007 (which I
> cannot cut and paste in because the hyperlink messes things
> up), regarding the proper treatment (expensing vs
> capitalizing and depreciating) of replacing a roof by
> removing all of the old shingles and installing new
> shingles.
>
> (snip)
> In your case, you haven't told us what the general state of
> repair was of the shingles you replaced, nor what the "other
> issues" were. You also haven't told us whether or not there
> were other less drastic means for achieving the goal of
> repairing the leaks. Finally, you haven't told us whether
> you replaced the shingles in order to add value to the
> property or to otherwise upgrade it (e.g., to make it more
> appealing to a wealthier class of tenants, which would
> constitute a capital improvement).
>
> (rest long post of good stuff snipped)
We bought the building in 1994. The inspection showed water
stains on the underside of the roof and in the ceiling of
the top-floor apartment. Examination on the roof shingles
showed many of them to be cracked and curling, which led to
the leaks.
After a few months, we decided to replace the shingles, in
order to fix the leaks and prevent any serious damage that
would occur due to the state of the shingles. After the
shingles were stripped off, some rot was found in the
sheathing of the roof. This was resolved by skinning the
roof with a layer of plywood before reshingling. Did the
roof have some life left? I suppose - roofs don't really
fail catastrophically, like say, a water heater.
We certainly didn't reshingle to add value or "upgrade" it
(never met a tenant yet who cared about how nice a roof is,
other than it didn't leak). The building was fully rented
when we bought it, so it was definitely "in service".
It may have been possible to find and patch the leaks, but
over time this would be more expensive than just
reshingling. Plus, I don't think I have an obligation to
repair in the cheapest possible way.
So based on what I have read, I think this would have
qualified as a repair for me.
I can't fill out a 3115 by myself though, I'd need an
accounting degree just to understand the form and
instructions. Seems like it is worth it to try, anyway. The
worst that can happen is the IRS denies the change, right?
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Posted by Bill Brown on March 1, 2007, 7:25 am
Please log in for more thread options way...@gmail.com wrote:
> <<SNIP>>
> We bought the building in 1994. The inspection showed water
> stains on the underside of the roof and in the ceiling of
> the top-floor apartment. Examination on the roof shingles
> showed many of them to be cracked and curling, which led to
> the leaks.
That is a highly relevant piece of information that you
omitted in your original post.
> After a few months, we decided to replace the shingles, in
> order to fix the leaks and prevent any serious damage that
> would occur due to the state of the shingles. After the
> shingles were stripped off, some rot was found in the
> sheathing of the roof. This was resolved by skinning the
> roof with a layer of plywood before reshingling. Did the
> roof have some life left? I suppose - roofs don't really
> fail catastrophically, like say, a water heater.
>
> We certainly didn't reshingle to add value or "upgrade" it
> (never met a tenant yet who cared about how nice a roof is,
> other than it didn't leak). The building was fully rented
> when we bought it, so it was definitely "in service".
>
> It may have been possible to find and patch the leaks, but
> over time this would be more expensive than just
> reshingling. Plus, I don't think I have an obligation to
> repair in the cheapest possible way.
>
> So based on what I have read, I think this would have
> qualified as a repair for me.
Not with your new, bad facts. Your replacement of the roof
was to bring the building up to a usable condition compared
to what it was when you bought it. The cost of the roof is
part of the cost of ACQUIRING the building.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by way222 on March 3, 2007, 5:26 am
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> That is a highly relevant piece of information that you
> omitted in your original post.
>
> Not with your new, bad facts. Your replacement of the roof
> was to bring the building up to a usable condition compared
> to what it was when you bought it. The cost of the roof is
> part of the cost of ACQUIRING the building.
We bought the building in June, and it was fully rented, so
it seems to me we could make a good case that the building
was in usable condition when we got it. The top floor tenant
was not complaining about leaks. It's possible the water
stains we saw were old, and the roof had been patched at
some point. It was actually quite difficult to examine the
roof, because it is 4 stories up (making it hard to see from
the ground), and neither I nor my inspector had a ladder
tall enough to get to the roof from the outside.
We didn't do the roof until December, 6+ months after we
bought it. This would seem to indicate to me the roof had
some life left, and I probably could have squeezed another
year out of it if I was willing to risk some minor water
damage.
Bottom line is, I have nothing to lose by trying, and I
think I have a good case. My understanding is that the IRS
has to approve it, and maybe they will say no, in which case
I'm no worse off than I am now.
And it seems to me that in general I should be more
aggressive about claiming repairs rather than improvements.
For example, when a water heater breaks and I have to
replace it, I've always capitalized it rather than deduct it
as a repair. And I had to replace a steam boiler that
cracked last year (in the middle of winter of course); since
the house will outlast the new boiler I certainly haven't
extended the life of the property, and the replacement just
brought back the house to its previosuly functioning state,
so I should consider this a repair.
This has been a very enlightening thread, thanks to everyone
who participated.
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Stuart A. Bronstein on March 4, 2007, 9:09 pm
Please log in for more thread options way222@gmail.com wrote:
> Bottom line is, I have nothing to lose by trying, and I
> think I have a good case. My understanding is that the IRS
> has to approve it, and maybe they will say no, in which case
> I'm no worse off than I am now.
It might be worth getting a formal opinion from a tax
lawyer, so that if the IRS does go after you later you might
be able to avoid some penalties if you turn out to be wrong.
Stu
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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