Let's play... repair or improvement!

[wayside]

1) re-shingling a roof?
2) replacing rotted single-pane wood windows and storms with double-pane vinyl windows?
3) vinyl-siding a building instead of painting?
4) replacing a functioning refridgerator that breaks?
5) replacing a functioning water heater that bursts?
6) replacing a boiler that cracks during the heating season?
7) replacing a space heater that breaks with a forced-hot-air heating system?
8) adding heater wires to a roof to prevent dripping and freezing on the sidewalk below?

Here's my opinion:

1) repair
2) repair
3) improvement
4) repair
5) repair
6) repair
7) improvement
8) repair

2) is the one I am least sure about, because double-pane is a minor functional upgrade over single-pane, and might therefore be considered an improvement; however, you can't get single-pane windows any more (not up to code), so it is not like you have a choice.

Please weigh in with your opinions and examples!

[Diane Kennedy]

I love this! I see a game show that only accountants could love...

1) re-shingling a roof?

It depends. LOL Normally we used to say if 25% or less is re-shingled it's a repair. Over that it's a capitalized asset that you have to depreciate. BUT had a significant case in CA that indicated you could take it all as repair IF you have a tenant in place who will move if the roof keeps leaking.

2) replacing rotted single-pane wood windows and storms with double-pane vinyl windows?

Improvement. But you can S 179 them AND maybe get an energy credit? (Check your state law)

3) vinyl-siding a building instead of painting?

Improvement. But again, can S 179 it.

4) replacing a functioning refridgerator that breaks?

Asset. S 179.
5) replacing a functioning water heater that bursts?

Asset S 179

6) replacing a boiler that cracks during the heating season?

Asset S 179

7) replacing a space heater that breaks with a forced-hot-air heating system?

Asset S 179

8) adding heater wires to a roof to prevent dripping and freezing on the sidewalk below?

Repair. Boy those bring back memories of Tahoe winters.

[wayside]

BUT had a significant case in CA that indicated you could take it all as repair IF you have a tenant in place who will move if the roof keeps leaking.

Are you talking about Campbell http://www.ustaxcourt.gov/InOpHistoric/Campbell.SUM.WPD.pdf?

If so, your interpretation seems very narrow to me. From the opinion:

Petitioner’s only purpose in having the work done to the
roof was to prevent the leakage and keep her rental house in
operating condition and not to prolong the life of the property,
increase its value, or make it adaptable to another use. As in
Oberman Manufacturing Co., there was no replacement or
substitution of the roof. Petitioner’s expenditure merely
restored her rental house to one with a roof free of leaks. On this record, we hold that petitioner is entitled to deduct the
expenditure in issue.

This fits me to a tee.

Asset S 179

Huh. I've always taken the "restore to previously operating condition" approach to things like water heaters and fridges, and deducted them as repairs. Guess I need to re-think that strategy.

What defines whether something is an "asset" vs. an improvement?

[Diane Kennedy]

Actually I was looking at an earlier case Charlie, your case is much better.

The improvement means it extends the life or improves the property. A repair just fixes something. It's pretty easy to blur the link here.

[wayside]

Hmm, publication 527 says

Section 179 deduction. The section 179 deduction is a means of
recovering part or all of the cost of certain qualifying property in
the year you place the property in service. This deduction is not
allowed for property used in connection with residential rental
property.

Is pub 527 wrong, and I can S179 stuff for my rentals?

[Diane Kennedy]

Pub is wrong. You CAN S 179 personal property. You can't S 179 real property, though - only the personal property.

[wayside]

From pub 947 chapter 2:

Excepted Property

Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property.

* Air conditioning or heating units.

Bummer.

Also from pub 947 ch 2:

Property Acquired for Business Use

To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

Sooo ambiguous.

If I replace a busted water heater, is this "for the production of income", or is only the building "for the production of income"?

Gah.

[jeffinca]

Petitioner’s only purpose in having the work done to the roof was to prevent the leakage and keep her rental house in operating condition and not to prolong the life of the property, increase its value, or make it adaptable to another use.

I believe the Diane was right on the original list... wayside had way too many things listed as repairs because they acted to "prolong the life of the property or increase its value".

At least that's what the position the training for my advanced law degree in taxation had on the matter. Obviously, there's a fine line and you could get one auditor to say one thing and another to say the opposite.

But most disturbing to me was the statement that the IRS publication is wrong. My training says § 179 is definitely limited to a trade or business, and taking on property "connected with" rental real estate is flat out a contradiction to the IRS' position on the matter. I'd tread very carefully on that issue.

I agree that if it were available at all, it would definitely be limited to the personal property (fridge, etc.) that is not permanently attached to the property. HVAC, etc. is attached and becomes part of the realty, so maybe that's what they meant in that specific exclusion. You have a much better argument on the fridge than anything permanently mounted like a roof, windows, HVAC, etc.

If anything, I'd limit my use of § 179 to unattached personal property and absolutely nothing permanently attached. (Note that "personal property" doesn't mean personal use, but rather the opposite of real property.)

On balance, I would not take a § 179 deduction on anything related at all or "connected with" rental property, and I'm even in the "trade or business" of real estate, which would offer yet another argument that you likely don't have unless you're a RE professional. But let me know what the auditor says after you do.

[hamiltonlee]

One of the secrets to running a successful business is to choose a business that is in demand no matter the economy. This is why owning and operating a home improvement business can be a smart move for the right company. In good times and bad, a person will spend more money on repairing and improving their home than on just about anything else.