Thursday, January 13, 2011

Can I deduct a new roof?

A reader sent in this question: I have purchased a piece of property with a building on it. The building's roof was in bad shape and I replaced it. My plan is to make this a rental property. Can this expense be deducted from my taxes? Thanks, Jerry My answer: Two issues here. The first is that you replaced the roof before you made the property a rental. You didn’t give be the dates. But suppose for example, you replaced the roof in 2010 and hope to turn it into a rental in 2011 … you’re out of luck. The second issue is a common one, even if you replaced the roof the same year it first became a rental: Rental property owners might think that any expense they incur is tax-deductible. I hate to burst anyone’s bubble, but that’s not quite true. The IRS separates work you have done on your rental as repairs or improvements ... A repair keeps your property in good operating condition. It does not add to your property’s value or prolong its life. Examples include: Fixing gutters, floors and leaks. Repairs are tax deductible the year you incur them. An improvement on the other hand, adds value to the property. Examples are a deck addition, a water softener and carpeting. Improvements must be depreciated over their life expectancy. It might not make a lot of sense, but the IRS considers a new roof an improvement since it increases the value and lengthens the life of the property. Therefore, you have to depreciate it over its life expectancy, for instance 20 years. However, if you had simply patched it, you could deduct the expense in the year you paid it. One of the many expensive lessons I’ve learned as a landlord is to make repairs as problems pop up instead of waiting until they multiply. It’s a lot cheaper than paying for extensive renovations, plus you get an immediate tax deduction. IRS Publication 527 is packed full of helpful tips on tax deductions for residential rental property. I suggest you give it a good read and bookmark for future reference. Good luck! George

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