Capex or Opex? Maximizing my deductions

[Robert Curls]

Hello BP!

I know I should seek the advice of a competent CPA or Tax attorney, but I wanted to get some opinions of others prior.  I understand you aren't giving tax or legal advice, so the disclaimer is out there.

I have some expenses that I need to take care of on some rental properties and wanted to see your thoughts if these fall under the categories of repairs (thus deductible) or if it was a capital improvement.

A/C: I "repaired" the compressor earlier this year when it went out, total cost was $2,500 would this be an improvement or a repair?

Treework:  I need to have some trees trimmed, my thoughts on this would be opex and a deduction

New carpet: This one I know is a capital improvement and must be amortized.

New Pool pump: I'm assuming capex also.

Thanks everyone!

[Brandon Hall]

@Robert Curls There is, unfortunately, not enough information here to determine whether or not each line item would be considered a repair or an improvement. It depends factors such as whether or not you qualify for the three safe harbors under the Final Tangible Property Regs, the affected unit of property (UOP), the materiality of the repair compared to the UOP as a whole, and the Betterment, Adaption, Restoration (BAR) test.

First - do you qualify for any of the following three safe harbors: (1) What is the unadjusted basis (purchase price plus improvements, do not factor in depreciation) of the property and how much have you spent in annual repairs for the property? (2) Did any of these repairs come about as a result of period inspections and do you expect to perform the same repair again within the next ten years? (3) Can you itemize your invoices to determine whether or not any of these costs can be allocated to personal property or small components of tangible property?

If you cannot qualify for any of the three safe harbors, the next step is the BAR test.

1. The A/C UOP is made up of ductwork and the A/C unit and it's parts. Since the A/C system can likely not function without the compressor in operating condition, replacing the compressor is considered a "restoration" of the A/C unit and material to the A/C system. However, if you have multiple A/C units (i.e. multi-family property) then replacing one compressor in one A/C unit may not be material to the entire A/C system as you will need to take into account the other A/C units and their corresponding ductwork. This is why people who own one building with many units can write off the costs of replacing entire A/C units if done strategically each year.

2. Treework and corresponding labor = maintenance, currently deductible.

3. Carpet is part of the Building UOP. The Building UOP is made up of the foundation, floors, walls, and roofs. Replacing the carpet in one room may very well be a repair when taking the entire Building UOP into consideration. If the carpet is classified as a capital improvement, depreciate over 5 years.

4. New pool pump will be part of the Pool UOP. This is likely a capital improvement. Depreciate over 15 years if the pool is not attached to or contained within the building, but rather built on land.