I have several rental properties in a HOA community. The asphalt driveways on several of the units are not good and have not been maintained over the years. I have hired a contractor to put down new asphalt and he has mentioned that tax laws state that I will be able to recoup 50-75% of the cost because it is a driveway. He did say this wouldn't apply to my personal home, but it would be considered a repair expense on a rental property. I agree with the repair part of that statement, but not sure about the deduction.
Does anyone have any insight on this particular expense and tax deduction?
I will also add that one of these units was just acquired this year while the other was purchased four years ago.
Repair deduction I understand. I do not get any other deduction or tax savings that I am aware of. Please let me know if you find anything different.
I'm looking for a tax professional to give me an estimate on repairing my driveway. :-0
Attempted levity aside, if you repaired the driveway on a rental property, the cost is deductible as a business expense. I have some guesses where the 50-75% numbers come from, but they would just be guesses.
When you contacted your tax professional prior to embarking on major repairs to your business properties, what did s/he say?
You generally must capitalize the related amounts paid to improve a unit of property (UOP). Because the construction of the driveway consists of the production of real property other than a building, all the components of the driveway are functionally interdependent and are considered a single unit of property and must be capitalized.
There are three safe harbors that you can be used to not capitalize the driveway. With the information you provided, I think two of them does not apply to you ( de minimis safe harbor for 2,500 or 5000 (Hoping the expense was higher than 2500 ) and routine maintenance safe harbor- does not apply to you).
The third one might apply, since we do not have info on your basis, please look into the Safe harbor for small taxpayers:
You can deduct improvement on the property does not exceed the lesser of(1) 2% of the eligible building property’s unadjusted basis or
Also, we should consider court cases over the years that have allowed few of the expenses related to the driveway to expense rather than capitalize. these are what court decided on few of them:
Per court case, these expenditures can be deducted as repair and maintenance for the driveway, parking lots etc:
1) recrowning and resurfacing with the same materials as in the road without lengthening or widening or changing basic construction
2) constructing logging road on adjacent state property including repairs to tractor used in constructing the road
3) patching asphalt steel mill driveway
4) resurfacing a three-year-old parking lot to restore it to its original condition after construction. Certain sections of the asphalt had originally been laid over excavations and this caused these sections to sink and allow water, snow, and ice to accumulate on the pavement.
5) slurry-sealing (a process of applying a watery mixture of insoluble matter) a parking lot. This was not a replacement of the paving material but at best a cosmetic rehabilitation with no structural value.
However, driveway and parking lots expense incurred were capital expenditures for:
1) access roads for logging operations;
2) relocating a public road;
3) hard-surfacing roads in the vicinity of taxpayer's property;
4) replacing gravel driveway with a cement driveway.
5) preparing a rental residential property for occupancy.
Thanks for the responses. As for what my "tax guy" said (who retired this year), the repair is an expense since the original driveway was already asphalt. The layout of the original driveway didn't change. Unfortunately, he didn't know much more than that and I obviously need to find someone else for future questions like this.
I ended up doing this on three driveways on properties I have in the same community. When I asked the contractor what he meant about the deduction, he said he didn't have the details and that would be a question for your "tax guy". All of the units have tenants in them so I don't know about the highlighted option #5 that Ashish posted.
The total cost was $8300 for the three ($3300, $2500 and $2500). I will post an update if I find anymore information.
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