New deck boards and railings: Depreciation or Repair?

Question

This Summer we personally replaced the deck boards and railings on one of the decks. The structure ( posts, joists, etc) were ok but the old deck boards were bad and it was time to replace them. It cost us about $1500 in supplies, no labor costs as we did it ourselves. Would this be considered a repair/supplies deduction or should it be depreciated? If depreciated, how many years?

Brandon Hall · Answer

@Silvia B.

@Jean Bolgeris likely correct here. I say likely because it will be difficult to say for certain with the limited information provided.

That said, you first need to determine if the expenses qualify as a current deduction under the Safe Harbor for Small Taxpayers as @Pat L. kindly linked to. The problem with this safe harbor is that it will be rare that you can fit your expenses under the ceiling, which is 2% of the unadjusted basis of the property.

Basically, all repair and capital expenses incurred during the year will be totaled up. If they exceed 2% of the unadjusted basis, you are disqualified from the safe harbor. If they are under the 2%, then all expenses can be currently deductible (generally a good thing).

Unadjusted basis essentially means the purchase price of your property plus improvements. So if you bought the place for $100k, the maximum you could spend during the year on repairs and improvements and still meet the safe harbor requirements is $2,000 (2% of $100k).

Assuming you can't meet the safe harbor requirements, which is likely, you will then need to get into the complicated section of the code to determine if the expense is currently deductible or should he capitalized. Specifically, we will be looking at the affected Unit of Property (UOP) and we will apply the BAR test - betterment, adaption, or restoration.

If the deck is attached to the primary structure (the house) the the deck will be part of the structure's UOP. If the deck is free standing, the deck will be its own UOP.

If the deck is attached to the building and therefore part of the structure UOP, then we need to figure out if the repairs on the deck were a betterment, adaption, or restoration to the UOP a as a whole. The "structure" UOP consists of all walls, foundations, floors, and roofs. While the repairs to the deck are considered a restoration (which will generally be capitalized), we can assume that the repairs are not material to the structure UOP as a whole since you are repairing a small portion of the entire structure. Because the repairs are an immaterial portion of the entire structure, I believe we'd be okay classifying these expenses as repairs and therefore they will be currently deductible.

If the deck is freestanding, the restoration will be considered material to the deck itself and the expenses will be capitalized and depreciated.

Pat L. · Answer

You could consider a partial disposition...although it's probably a minor gain In your case. We were able to do this on an $18,000 commercial building roof replacement.

I enjoy finding & applying every angle there is ....

Here is a brief writeup of this scenario that makes it worth considering for any relevant high cost capitalizations.....

"...Suppose a landlord replaces a roof on a rental property. When the property was originally placed in service as a rental, the cost of the property was split into two components: land and building. The land is a non-depreciating asset. The cost of the building is capitalized and then depreciated over a period of years (27.5 years for residential real estate or 39 years for commercial real estate). Thus the cost of the old roof is included in the cost of the building and is being depreciated over time.

Now that the landlord replaced the roof, the 'Cost' needs to be capitalized and depreciated (over 27.5 years or 39 years, as applicable). So now the landlord has two assets being depreciated: the original building and the new roof. But the old roof is included in the building. So in a way, the landlord is depreciating an asset (the old roof) that no longer exists. In this case, the IRS allows the landlord to make a partial disposition. In essence, the landlord can write off the cost of the old roof (thus removing that part of the cost from the building's depreciation schedule).

What's the benefit? This allows for an immediate deduction for the old roof, which offsets the downside of having to depreciate the new roof over several years. And, this removes the old roof (its historical cost and its accumulated depreciation) off the taxpayer's balance sheet. And for an added bonus, there is no depreciation recapture because there was no sale or exchange, Thus partial dispositions result in less accumulated depreciation to recapture if the property is ever sold in the future....."

Brandon Hall · Answer

@Silvia B.

Thank you :)

Appliances are personal property which means you can apply the De Minimis safe harbor. The De Minimis says you can expense personal property items under $500 per item or invoice. So if you have a $400 stove, you don't have to depreciate it.

In summary, see a CPA.

Jean Bolger · Answer

well... my brain hurts, lol!

This is the kind of thing that makes me so glad there are professionals like Brandon to do the required thinking about this.

Silvia B. · Answer

Brian, I don't think you can chose to deduct or depreciate solely based on amount. What if you replaced a stove that only cost $500? The amount is not significant but aren't you supposed to depreciate appliances over 5 years?

Silvia B. · Answer

Brandon,wow! Thanks for such a detailed explaination. I really do appreciate your time spent on answering this for me. Since this deck is attached to the house, it looks like I would be safe in deducting it as a repair.

Brian Tremaine · Answer

I'm not an accountant and not giving legal advice about as an experienced rental owner I would take the full amount as an expense in the year incurred because the total cost is not that significant to be depreciated.

Silvia B. · Answer

I am thinking the same thing and would love to hear from those more experienced than myself.

Pat L. · Answer

We have been advised on using the following 'election' but we have mixed use commercial & a Farm so may have a lot more leeway ...........

Safe Harbor Election for Small Taxpayers

You are not required to capitalize as an improvement, and therefore may deduct, the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements or similar costs, that fall into the safe harbor election for small taxpayers. The requirements of the safe harbor election for small taxpayers are:

• Average annual gross receipts less than $10 million; and
• Owns or leases building property with an unadjusted basis of less than $1 million; and
• The total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property doesn't exceed the lesser of-   Two percent of the unadjusted basis of the eligible building property; or
$10,000; and
• Two percent of the unadjusted basis of the eligible building property; or
• $10,000; and
• You make the election to use the safe harbor for each taxable year in which qualifying amounts are incurred.   The election is made by attaching a statement to your income tax return for the taxable year. See When and how do you make an election provided under the final regulations?
An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year.
• The election is made by attaching a statement to your income tax return for the taxable year. See When and how do you make an election provided under the final regulations?
• An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year.

• Two percent of the unadjusted basis of the eligible building property; or
• $10,000; and

• The election is made by attaching a statement to your income tax return for the taxable year. See When and how do you make an election provided under the final regulations?
• An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year.

http://www.irs.gov/Businesses/Small-Businesses-&-S...

Silvia B. · Answer

• I don't think it would be depreciation as part of the house. We bought the house 5 years ago and began the house depreciation  then. I think an example would be if you had a new roof installed. A complete new roof would be a separate depreciation vs if only part of it was repaired.

New deck boards and railings: Depreciation or Repair?

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