Roof Betterment, Restoration or Expense

2 Replies

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.

@Christopher Smith , you are correct.  Here are the regultatory examples for your reference:

Example 13. Not a betterment; new roof membrane

M owns a building that it uses for its retail business. Over time, the waterproof membrane (top layer) on the roof of M's building begins to wear, and M began to experience water seepage and leaks throughout its retail premises. To eliminate the problems, a contractor recommends that M put a new rubber membrane on the worn membrane. Accordingly, M pays the contractor to add the new membrane. The new membrane is comparable to the worn membrane when it was originally placed in service by the taxpayer. Under paragraphs (e)(2)(ii) and (j)(2)(ii) of this section, an amount is paid to improve a building unit of property if the amount is paid for a betterment to the building structure or any building system. The roof is part of the building structure under paragraph (e)(2)(ii)(A) of this section. The condition necessitating the expenditure was the normal wear of M's roof. Under paragraph (j)(2)(iv) of this section, to determine whether the amounts are for a betterment, the condition of the building structure after the expenditure must be compared to the condition of the structure when M placed the building into service because M has not previously corrected the effects of normal wear and tear. Under these facts, the amount paid to add the new membrane to the roof is not for a material addition or a material increase in the capacity of the building structure under paragraph (j)(1)(ii) of this section as compared to the condition of the structure when it was placed in service. Moreover, the new membrane is not reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the building structure under paragraph (j)(1)(iii) of this section as compared to the condition of the building structure when it was placed in service. Therefore, M is not required to treat the amount paid to add the new membrane as a betterment to the building under paragraph (d)(1) or (j) of this section.

Example 15. Not replacement of major component or substantial structural part; roof membrane

L owns a building in which it conducts its retail business. The roof decking over L's building is covered with a waterproof rubber membrane. Over time, the rubber membrane begins to wear, and L begins to experience leaks into its retail premises. However, the building is still functioning in L's business. To eliminate the problems, a contractor recommends that L replace the membrane on the roof with a new rubber membrane. Accordingly, L pays the contractor to strip the original membrane and replace it with a new rubber membrane. The new membrane is comparable to the original membrane but corrects the leakage problems. Under paragraphs (e)(2)(ii) and (k)(2) of this section, an amount is paid to improve a building if the amount is paid to restore the building structure or any building system. The roof, including the membrane, is part of the building structure as defined under paragraph (e)(2)(ii)(A) of this section. Because the entire roof performs a discrete and critical function in the building structure, the roof comprises a major component of the building structure under paragraph (k)(6)(ii)(A) of this section. Although the replacement membrane may aid in the function of the building structure, it does not, by itself, comprise a significant portion of the roof major component under paragraph (k)(6)(ii)(A) of this section. In addition, the replacement membrane does not comprise a substantial structural part of L's building structure under paragraph (k)(6)(ii)(B) of this section. Therefore, L is not required to capitalize the amount paid to replace the membrane as a restoration of the building under paragraph (k)(1)(vi) of this section.

Originally posted by @Logan Allec :

@Christopher Smith, you are correct.  Here are the regultatory examples for your reference:

Example 13. Not a betterment; new roof membrane

Example 15. Not replacement of major component or substantial structural part; roof membrane

Thanks for the details. Almost sounds as if I could do a shingle tear off and still be able to expense. Won't do that because of additional cost, but good to know I am well within the lines for expensing. 😀

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