Roof Betterment, Restoration or Expense

[Christopher Smith]

Sorry this is a long one:

Contemplating doing a new simple Shingle overlay on a rental property roof. In other words, not doing a tear off of the old Shingles just laying a new layer over the old. I have a guy who has been doing this for 35 years and he assures me (and my property manager for 15 years does as well) that this is by far the most efficient and cost effective way to do it, and both will guarantee the job - so no issues there.

The question is the tax treatment. I have thought that because it is no more than adding an outer roofing cover, no tear off required, no structural elements involved, that a strong case could be made for immediate expensing. When I posed this question in the past its always been about a 50/50 split, with folks very adamant in their position on both sides, expensing v capitalization. Good enough.

A came by a recent article in the "Tax Adviser" in the Tax Insider portion of the publication. This is generally a well respected solid tax publication. The article is "Guide to Expensing Roofing Costs". 

It purports to apply criteria taken directly from the governing tax regulation carrying out the general tax rules on capitalization as the template for making a call on this specific issue. I was somewhat surprised by the results which seem at first impression to provide that a simple re-shingling can be expensed, and not capitalized. To be expensed under the regulations, it generally can't be a Betterment or Restoration since that would require capitalization. 

The article posed the following questions (which I have answered), to arrive at the conclusion:

Betterment questions:

1) If the roof was replaced due to sudden damage, the costs to restore to the same condition and using same materials is not a betterment - It was not due to sudden damage, so this question appears to be N/A on its face.

2) Was the effort effectively made as part of the original acquisition of the property, if so its a betterment - NO it will not be, so this question appears to be N/A as well.

3) Were improved materials (e.g., going from shingles to to clay tiles) used, if so it may be a betterment - NO the same grade shingle will be used, so again N/A.

4) Was the work related to an enlargement of the building, if so it may be a betterment - NO, so again N/A.

XX) Tentative Conclusion - this is NOT a Betterment

Restoration Questions:

1) If ONLY the outer roof covering (e.g., Shingles) were replaced, but NONE of the underlying roof system/s, it is NOT a restoration - this appears to be directly on point and appears to point strongly to expensing

2) If any significant load-bearing elements (e.g., decking/sheathing) were replaced, then the entire cost is likely a restoration - NO load-bearing elements were implicated, so this is N/A.

3) If more than 40% of the insulation layer was replaced, it may be a restoration - NO insulation will be implicated, so this is N/A

4) Did the Taxpayer claim a retirement loss for any portion of the old roof - NO, so this should be N/A

5) Was the roof work performed because of other capital improvements - NO, so this should be N/A

XX) Tentative Conclusion - this is NOT a Restoration

I need to read the regulation closely to fully verify the above, but it seems as if their is sufficient basis for taking the position that a simple reshingling (and no more), can be expensed and not captialized. See regulation Examples 13 under Betterments, and 15 under Restorations - roof membrane replacement.

The article was written and submitted by a Cost Segregation Group.