Owning a rental unit can open the door to additional income opportunities to help grow wealth over time. However, for those who own rental property, you know that keeping up with the maintenance of your property is essential. And, yes, sometimes those costs can be quite hefty. For example, a new roof.
When rental property owners are faced with significant repairs like a new roof, the question of whether or not the cost is fully tax-deductible comes into play.
The IRS allows rental property owners to deduct specific expenses for some property improvements and these deductions help lower the amount of rental income that is subject to taxes. But how does a new roof fit into those deductions?
In this article, we’ll help you understand your options when it comes to evaluating whether or not a new rental property roof is tax deductible.
Key takeaways
- Rental properties experience wear and tear, requiring investors to make repairs or improvements to protect their investment and keep a home safe and habitable for tenants.
- Repair costs can typically be expensed in the year the expenditure is incurred, while capital improvements are added to the property cost basis and depreciated over an extended period of time.
- The cost of a new roof on a rental property is usually depreciated over a period of 27.5 years.
Rental Property: Roof Repair vs. Capital Improvement
People often ask, “Can I expense a new roof on a rental property?” According to IRS rules, most rental property expenses related to maintenance and physical improvements can be considered capital improvements or, if the expense meets the requirements, can be considered repair expenses.
What Is Considered a Capital Improvement?
According to the Internal Revenue Service (IRS), a capital improvement must endure for more than one year upon its completion and be durable or permanent in nature. These capital improvements can add more value to the property, adapt it for a different or new use, or restore it to its previous glory. If it meets IRS regulations, a new roof falls under “capital improvement,” implying that while it is expected to have a useful life of more than one year, it will also be subject to eventual deterioration and/or obsolescence.
The influence of time often leads to the depreciation of assets, and the IRS therefore allows you to take a portion of the total cost as a deduction during each year of the expected useful life of the improvement. This means that it is more likely that you will expense your new roof on a rental property as a depreciation expense, instead of taking a regular rental business expense of the entire amount in the first year.
The IRS considers it an “improvement” whenever an investment property, such as a rental, undergoes a betterment, adaptation, or restoration. As officially defined by the IRS, ‘“A unit of tangible property is improved only if the amounts paid are for a betterment to the unit of property; or to restore the unit of property; or to adapt the unit of property to a new or different use.”’
In other words, a capital improvement project is often something that prolongs the life of the property and/or increases the property’s value.
What Is Considered a Repair?
Repairs are generally those changes you make to a rental property in order to keep it in its existing condition. If you are conducting maintenance and making repairs to fix damage, let’s say due to wear and tear or an accident, it’s often considered an expense.
Think about it this way: a repair to the roof might be necessary to keep the rental habitable and in good working condition, but you’re still moving forward with the same roof. For deductible expenses such as this, the full cost of repairs can be evaluated as a deduction for the same year it’s incurred.
Related: Keeping track of repairs, improvements, and capital expenses can quickly become complicated, even with just one rental property.
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How to Deduct Roof Replacement on Rental Property
The tax treatment for a new roof is different from a roof repair. That’s because the IRS treats a new roof on a rental property as an asset prone to deterioration and/or eventual obsolescence. So, how can you think about deducting your rental’s new roof from your taxes?
Meet The IRS Requirements
Before depreciating your new rental roof, you must ensure that it meets the requirements set by the IRS. To depreciate it, the IRS requires that the property:
- Be under your ownership and not rented from someone else
- Be held either for investment or business purposes
- Have a determinable, useful life
- Have a useful life of more than a year
- Not be “excepted property”
Per the IRS, ‘“excepted property, as described in Publication 946, includes specific intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.”’
If your rental property meets all of the above conditions, you can move on to figure out how to handle the depreciation of the new roof.
Determine Rental Roof Depreciation
If you just put a new roof on a rental property, you’ll need to gather the specific details about the project including total spend and completion date. Once you have those items at hand, here’s how to evaluate depreciating a new roof on a rental property.
Figure Out Depreciation Timeline
First, you need to know the start and end dates of the depreciation schedule for the new roof. These dates cover the time period between “date placed in service” and the expiration of the expected “useful life” of the new roof.
How do you figure out the starting date? Does the property currently have a tenant? If yes, your depreciation date will start when the roof is installed. But, if you do not have a tenant when installing the new roof, your service and depreciation dates begin when the property itself is once again ready to lease. See IRS Publication 527 for more information.
The time period for depreciating the new roof on a rental property will depend on whether the property is a residential rental unit or a commercial rental unit. The IRS allows for a recovery period or “useful life” of 27.5 years for residential rental property and certain improvements and additions. A commercial rental unit’s useful life, along with its improvements and additions, is typically 39 years per the IRS Publication 527.
Depreciation ends after 27.5 years when you have fully recovered the cost of the new roof. You may have to adjust your tax returns and will likely have to deal with depreciation recapture if you sell the property or stop using it as a rental home before depreciation is fully exhausted. We recommend you consult a CPA or tax professional on how to best structure your tax filings should these changes be made.
Calculate Depreciation
The straight-line method is the most common and ‘straightforward’ method to calculate depreciation expenses for a new roof. On this basis, the depreciation expense amount will be the same throughout the roof’s useful life, except for any partial calendar years at the beginning and/or end of the 27.5 years. It is calculated by dividing the cost of the new roof by 27.5 years.
For example, if you spent $20,000 on the new-roof for a residential rental property, your depreciation will be $727 per full calendar year ($20,000 / 27.5). Therefore, $727 is the depreciation expense you will claim (on an annual basis) during the roof’s useful life over the next 27.5 years.
Remember that the starting date for depreciation is the service date of the roof. So, even if you installed the roof in the middle of the year, you can claim the expense for those few months it will be in service in that first calendar year using the applicable convention.
Once you know the start date, calculating the depreciation is reasonably straightforward. First, collect your receipts and calculate the total cost of the new roof. Improvements are depreciated using the straight-line method, meaning that you must deduct the same amount every year over the roof’s useful life. The IRS designates a useful life of 27.5 years, so divide the total cost of the roof by 27.5 to reach the amount you can deduct each year.
Claim Deduction
Individual taxpayers report income and expenses for rental properties on Schedule E of Form 1040. Take your annual depreciation deduction and prorate it (using an acceptable IRS convention) for the time period the roof was in service during the first tax year — this is the figure you enter in line 18.
You must also file form 4562 in the year your new roof is installed and in service. The form’s guidance notes explain in detail how to complete the tax forms and we highly recommend consulting a qualified CPA or tax advisor before filing your returns.
Example Of New Rental Roof Tax Expense
Let’s assume an investor purchases a single-family rental (SFR) property for $240,000 on January 1, which includes a lot value of $20,000. One year later, the roof is replaced at a cost of $40,000, something the investor knew about and budgeted for when the property was purchased.
When the property is purchased, the cost basis for depreciation is $220,000, which is determined by subtracting the estimated $20,000 land value from the purchase price, because land is not depreciable under the IRS rules. In the second year, the adjusted cost basis increases by the $40,000 spent on the new roof, which is reached by adding $40,000 to the cost basis. Depreciation of the roof begins in the second year since that is when the new roof is placed into service.
Here’s additional information on how the depreciation expense would be recorded during the first two years of ownership:
FAQs: Tax Deductions for Replacing a Roof on Rental Property
For those wondering if a new roof on a rental property is tax deductible, here are a few other frequently asked questions.
Where Do You Put a New Roof for a Rental Property in TurboTax®?
To enter rental information in TurboTax, log into your tax return and type “rental income and expenses” in the search bar, then select “jump to rental income and expenses.” TurboTax will guide you in entering the information from there. For more information, check out these step-by-step instructions.
What Happens If I Sell the Property before the Depreciation End Date?
If you remove the property from service—meaning, you stop using it to generate income because you either sold it or decided to stop renting, then the depreciation break ends and you may be subject to depreciation recapture tax.
Does a New Rental Roof Qualify for Bonus Depreciation?
Bonus depreciation allows property owners to write off the cost of a capital improvement immediately.
In 2017, the Tax Cuts and Jobs Act made significant changes to depreciation rules, including allowing real estate investors to expense 100% of certain capital improvement costs in the tax year the expenditure was incurred. As a result, bonus depreciation can reduce tax liability in the first year, and even create a net loss for income tax purposes.
Unfortunately, bonus depreciation only applies to assets with a useful life of 20 years or less, such as appliances, fences, landscaping, etc..
One of those improvements or additions is a new roof. Due to this, a new roof expense on a rental property typically does not qualify for bonus depreciation.
Is Depreciation Mandatory for a Rental Property?
Nope, you are not legally required to depreciate rental property. However, choosing not to depreciate rental property could be a massive financial mistake. Pretty much, it’s like you’re pouring a percentage of your rental property profits down the drain. And depreciation recapture tax will nearly always be applicable when you sell the property, regardless of whether you actually took the depreciation expenses in the first place.
How Often Do You Replace the Roof on a Rental Property?
This depends on how well you take care of the roof and surrounding environment, the harshness of the weather, and the roofing material used. For example, a landlord that allows tree branches to grow too close to the roof creates a situation where shingles or other roofing materials may deteriorate more quickly.
Some tenants might not report small issues as soon as possible, such as a missing shingle. Therefore, it’s important to do regular rental maintenance checks to ensure all is in good order.
However, you’ll still want to consider the roof’s age. Typically, you can expect a roof to need replacement within a rough age range, depending upon the materials used and
the workmanship associated with the original installation. According to Forbes, here’s a tentative timeline for how long roof materials typically last:
- Asphalt shingle: 15 to 30 years
- Clay tile: 50+
- Metal: 20 to 50 years
- Wood: 30+ years
Keep in mind that these are just averages. A roof might need to be replaced sooner if it is regularly subjected to extreme weather or other negative factors.
So, Is a New Roof Tax Deductible?
As discussed in detail above, if you replace the roof of your rental property, you can likely claim an annual depreciation expense. As for roof repairs, any roof repairs made to a rental property can usually be written off as a tax deduction or expense in the year incurred.
The bottom line is that you can expense a new roof on a rental property by claiming an annual depreciation expense as long as the new roof qualifies as an improvement, restoration, or betterment of the property. The new roof is also treated as a separate asset from the existing structure of the property, which means you can depreciate it over its useful life of 27.5 years.
You must maintain a paper trail or digital record to prove the deductions claimed on your tax return are true and accurate. For example, keep before and after pictures of the property and invoices and receipts for all payments made.
Finally, we also highly recommend that you consult your tax advisor or certified public accountant (CPA) to ensure the tax calculations for the new roof meet the latest IRS regulations, are accurate, and are sufficiently documented.
