Tax Treatment of Roofing Costs - Can I Expense My Roof Repairs?
August 18, 2017
This is a common question we receive from our business and rental real estate clients and the answer is always, “Well, it depends.” Roofing costs must be capitalized if they are considered a capital improvement which is defined as an amount paid after a property is placed in service that results in a betterment, restoration or adaptation. Below, we take a practical look at each of these categories in relation to roofing repairs to determine which costs may qualify for expensing.
A betterment may occur under the following circumstances, requiring the roofing costs to be capitalized:
- The roof is repaired soon after the purchase of the building and corrects a defect or condition that existed before the building was purchased.
- The roof covering is replaced with improved materials that increase the efficiency, strength or quality of the building, such as replacing 20-year asphalt shingles with 50-year clay tiles.
- The roof expense is part of an addition to the building.
The following situations would generally not be considered a betterment, thus making the roofing costs eligible for expensing:
- The roof is replaced due to sudden damage and the same materials are used.
- The repair occurs several years after the building was purchased to replace a roof covering that is worn out due to normal wear and tear.
- Improved roof materials are used because comparable materials are no longer available or the prior roof materials are no longer up to current industry standards.
The following examples illustrate a possible restoration, which would be subject to capitalization:
- More than 40% of the load-bearing structural components of the roof, such as the decking, are replaced as part of the project.
- More than 40% of the insulation layer is replaced during the project.
- The roof had completely deteriorated to an unusable condition.
- The roof is replaced due to damage from a casualty event and the casualty loss is properly deducted by reducing the basis of the building by the amount of the loss.
- The taxpayer deducted a total or partial disposition loss for a portion of the old roof.
The following circumstance illustrates what may not be considered a restoration and thus eligible for expensing:
- Only the outer roof covering was replaced; none of the underlying roof system was replaced.
Adaption may occur when the roof costs are part of an additional capital improvement project such as the following:
- The installation of new HVAC units may require extensive changes to the roof.
- The installation of solar panels may require additional structures on the roof.
Roofing costs incurred in these types of situations would not be eligible for expensing.
Determining whether a roofing project should be treated as a current year repair expense or a capital improvement requires careful analysis. In many cases, the costs can be expensed. If you have questions about the tax treatment of roofing costs, please don’t hesitate to contact one of our offices.