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Repairing Water Damage Caused By Tenant: Expense vs Improvement

Forum|Forum|3 years ago
June 28, 2022
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Had a tenant's child clog upstairs toilet with toys, etc. No one noticed overflowing issue which resulted in ceiling sheetrock below crashing to first floor. Much of ceiling needs to be repaired costing about $10,000, no insurance (self-insured for multiple units for last 30 years).

Expense or Improvement/restoration? How do I enter in Premier? Anyway to make full expense recognized in year it happened?

Appreciate any insights.

Best answer by Anonymous_

You can make that determination based upon the information set forth in Publication 527 (below), but this really does not appear to be something that needs to be capitalized; it appears to be a repair that can be expensed.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000280324

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.

Betterments.

Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.

Restoration.

Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.

Adaptation.

Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.

A

Anonymous_Answer

Employee

You can make that determination based upon the information set forth in Publication 527 (below), but this really does not appear to be something that needs to be capitalized; it appears to be a repair that can be expensed.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000280324

Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.

Betterments.

Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.

Restoration.

Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.

Adaptation.

Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.

R

robricbreAuthor

Thanks for replying. That's the info I was looking through before I posted. It's the restoration language that is fuzzy to me vs repair.

Carl11_2

Employee

What you need is a clear and understandable explanation of a repair, and a property improvement.

Property improvements are expenses you incur that Improve, restore, or otherwise “better” the property. Basically, they retain or add value to the property.

A repair expense are those expenses incurred to return the property or its assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable.

Sounds to me like your situation meets the definition of repair expense. However, the cost of that expense might raise flags with the IRS, as well as your state if your state taxes personal income. So keep all your before and after pictures along with all receipts and other paperwork related to this. If questioned on this by the IRS, solid documentation will be what saves you. Overall, I think the chances of the expense being questioned are slim..... but not impossible. Three rules to keep in mind when dealing with the IRS.

1) You are guilty until proven innocent.

2) The burden of proof is on the accused (that would be you!) and not the accuser.

3) If it's not in writing, then it did not occur.

It's the restoration language that is fuzzy to me vs repair.

I agree. The restoration language seems rather subjective. My interpretation of a restoration is returning something to it's original condition from an "upgraded" condition. For example, replacing the front concrete steps to the porch with wooden steps identical to the steps that were there when the house was originally built, would be restoration in my eyes.

O

Opus 17

Employee

I can't see repairing sheetrock as an improvement. It doesn't have a limited life (like carpet) and replacing a sheetrock ceiling doesn't seem to add value or count as a "betterment".

I could see that replacing carpet damaged by the water, or a warped wood floor, could skirt the boundary of repair vs improvement, especially depending on the age of the old flooring and the type of new flooring installed. And I suppose if you installed a "better" ceiling (exposed wood beams, decorative tin or plaster panels, raised ceiling, crown molding, etc.) that might also skirt the boundary. But in the ordinary course of life, the mere fact that the damage was extensive (a whole unit instead of a single hole) does not make it an improvement.