Expense or Depreciation?

[Tax Prep by Deb]

I have a client that has a rental property. She had to do some work in her rental's bathroom due to a leak that resulted in dry rot. She spent $6,598.98 to tile the shower, replace the leaky faucet and repair the dry rot. Does this qualify as a repair, or should I depreciate it. If I do depreciate it what class and how long?

Thanks,

Deb!

[Wayne Brasch]

I have a client that has a rental property. She had to do some work in her rental's bathroom due to a leak that resulted in dry rot. She spent $6,598.98 to tile the shower, replace the leaky faucet and repair the dry rot. Does this qualify as a repair, or should I depreciate it. If I do depreciate it what class and how long?

Thanks,

Deb!

Deb,

If I were preparing that client's return, I would expense that amount and be prepared to explain to IRS how this expenditure restored that property instead of improving it.

Wayne Brasch

[Tax Prep by Deb]

Deb,

If I were preparing that client's return, I would expense that amount and be prepared to explain to IRS how this expenditure restored that property instead of improving it.

Wayne Brasch

I just got off the phone with the client, and we agreed it should be an expense. It simply brought it back to being usable. Leaving it alone created a mold hazard that would have been far more costly to fix. So it seems logical to me that what was done was a repair, not simply to add life!

Deb!

[Catherine]

Deb,

If I were preparing that client's return, I would expense that amount and be prepared to explain to IRS how this expenditure restored that property instead of improving it.

Wayne Brasch

I concur with Wayne -- the cause of the work was a leak; fixing the leak restored functionality and prevented further structural damage. Expense.

Now if your client had replaced a standard Delta faucet with a hoity-toity high-end model, put in new ultra-spifferific high-end counters to replace ye olde cultured marble, added full body spray steam units to the shower, and stuff like that, then you'd have to split out the needful repair versus the upgrades.

And I'd say even replacing a cheapo faucet with a mid-grade sturdy one is still repair under the heading of "why waste money putting in junk?"

[OldJack]

Now if your client had replaced a standard Delta faucet with a hoity-toity

I also concur with Wayne --

Just wondering Catherine what resource you use to support that a hoity-toity faucet would not be repair or is it just that it was a high end model? :D

[Catherine]

I also concur with Wayne --

Just wondering Catherine what resource you use to support that a hoity-toity faucet would not be repair or is it just that it was a high end model?

Well, it just seems that replacing a $29 "Peerless" brand bathroom faucet with a $3300+ Jado swan-sculpture faucet with crystal knobs would be hard to justify as a "repair". So it's definitely the hoity-toity/mucho bucko part that pushes it over the edge for me.

And again, that's not saying you have to replace junk with more junk! But "repair" does become "upgrade" at some point.

Catherine

[jainen]

>>a $3300+ Jado swan-sculpture faucet with crystal knobs<<

How would that extend the life of the property or, other than being somewhat nicer to look at, provide new functionality?

[joanmcq]

Because its an upgrade. One thing I would clarify is that the bathroom had tile originally. If you're replacing cheap laiminate with tile, I'd call the cost of the tile over laminate an upgrade and depreciable. If you are replacing tile with tile, then its a repair.

[jainen]

>>its an upgrade<<

The regs don't mention "upgrade" as such. There are three tests as to whether an expenditure must be capitalized.

1) It prolongs an asset's life,

2) It substantially increases the asset's value, or

3) It makes it suitable for a different use.

I don't see how a cosmetic change in a plumbing fixture constitutes a capital improvement.

[Edward]

The following is taken from QF Depreciation Handbook on "Repairs vs. Capitalized Costs": Whether a cost is an ordinary repair or should be capitalized has been a source of much controversy. Many courts test expenditures by looking at whether the cost "puts" an asset in working condition (capital expense) or "keeps" it there (repair). Also, amounts expended to restore property to its original condition are repairs. An expenditure can be quite large without prolonging the asset's life or substantially increasing its value. If it dosen't meet any of the three tests (as listed by Jainen), it should qualify as a repair, regardless of the amount".

[kcjenkins]

And while a 3K faucet might seem on first glace to meet no. 2, what you have to look at there is does it increase substantially the value of the House, not the faucet. That is the asset in quesiton. If it's a 150K house with normal plumbing fixtures, and after the changes it is now a 151K house, that is not a substantial increase. After all, while a nice bathroom helps, it will not sell a house if the rest of the house does not match it.

[Tax Prep by Deb]

Thanks to all who responded. We decided to go with a repair as it really did do nothing to increase the value of the property. It was necessary not only to fix the problem, but hopefully to keep it from happening again.

Thanks,

Deb!