Sewer line fix capitalize or expense

Tax, SDIRAs & Cost Segregation
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Sewer line fix capitalize or expense

Mark Forest
Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes

Hello, I have asked this question before, but after doing research I must disagree with the original poster. I spent almost $5K to have a plumbing company dig a hole in my yard and put a $6 boot on a cracked sewer line. I see this as an expense even though it was quite costly. According to my research a capital asset is:

The IRS indicates what constitutes a real property capital improvement as follows:

Fixing a defect or design flaw

Creating an addition, physical enlargement or expansion

Creating an increase in capacity, productivity or efficiency

Rebuilding property after the end of its economic useful life

Replacing a major component or structural part of the property

Adapting property to a new or different use

A repair is as follows:

Improvements that "keep" property in efficient operating condition

Restores the property to its previous condition

Protects the underlying property through routine maintenance

Incidental Repair to property

Reference is http://www.dbbllc.com/newsletters/focus/mar2012/irs-clarifies-capital-improvement-vs-repair-expense

Next time I will rent a small excavator, dig my own hole, and put on a Fernco. Done! Isn't this very expensive repair restoring the property to its previous condition?

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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
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Originally posted by @Ashish Acharya:

@Mark Forest , 

...

If you had just patched the crack that would be repair. You replaced the whole thing. This is same as replacing Roof or repairing few shingles. 

...

From what I read, he did not replace the whole thing; the plumber just applied a $6 coupling to patch the cracked section.

So does that change how this should be approached tax-wise?

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
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    @Mark Forest , 

    I know that depreciation is a very complex area of tax.  To make it very simple, if an expenditure produces both current and future year benefits, the determination as to whether the cost should be capitalized or expensed should be based on a careful examination of all the facts.

    Taxpayers must capitalize amounts paid to restore a unit of property. The regulations provide a list of situations where the unit of property is restored, such as if the expenditure

     (a) returns a unit of property that deteriorated to a state of disrepair (and can no longer be used for its intended purpose) to its ordinarily efficient operating condition or

     (c) replaces a part or a combination of parts that comprise a major component or substantial structural part of a unit of property

    If you had just patched the crack that would be repair. You replaced the whole thing. This is same as replacing Roof or repairing few shingles. 

    The good news is you can do partial disposition of the old sewer line and take the loss. You have to make that election on your Tax Return. 

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
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    Originally posted by @Ashish Acharya:

    @Mark Forest , 

    ...

    If you had just patched the crack that would be repair. You replaced the whole thing. This is same as replacing Roof or repairing few shingles. 

    ...

    From what I read, he did not replace the whole thing; the plumber just applied a $6 coupling to patch the cracked section.

    So does that change how this should be approached tax-wise?

    1Reply
  • Mark Forest
    OP
    Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes
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    @Ashish Acharya  Yes Steve is right.  99.99% of cost is to dig a big hole.  Then a $6 boot was put in place.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @Mark Forest:

    @Ashish Acharya  Yes Steve is right.  99.99% of cost is to dig a big hole.  Then a $6 boot was put in place.

     Oh, I mistakenly read $6k rather than $6.  You got it right. 

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  • Mark Forest
    OP
    Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes
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    @Ashish Acharya  so are you saying it is or is not to be capitalized?

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
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    @Mark Forest

    You paid for a repair.  If this was your primary residence or second home, repair costs are non-deductible.  If this was your rental property, you claim your repair expense on Schedule E.

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  • Mark Forest
    OP
    Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes
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    @Dave Toelkes  Its a rental property.  I like what you are saying, but according to the CPA in the thread above here this is a capitalized item I will have to depreciate.  I am not happy about it!

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
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    @Mark Forest

    It sounds like the sewer line was not improved or the life of its use was not extended.

    I would think it to be a repair and expensed in the current year.

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  • Mark Forest
    OP
    Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes
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    @Basit Siddiqi  I don't even have an asset when I am done.  I paid to have a hole dug.  I agree with your logic. 

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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
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    @Mark Forest I think if you try to take it as a repair you will be arguing before an IRS auditor . 

    Second , dont use that plumber again . 

    To rent a mini ex for the day , delivered and picked up is about $700 . And a fernco is 6 bucks .  Quite a savings .  

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  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    8y

    A grey area but my tax/CPA guy sent me this on the $9,000 sewer repairs we had in 2016 & so far no objections from the IRS.

    Safe Harbor for Small Taxpayers

    Repairs can be deducted immediately if the total amount paid for repairs and maintenance on the property is less than or equal to $10,000 or 2 percent of the unadjusted basis of the property, whichever amount is lower. And the safe harbor is only available for businesses with revenues under $10 million and the property being repaired has an unadjusted basis under $1 million.

    & from the IRS website ....

    What is the de minimis safe harbor election?

    Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice).

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
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    Originally posted by @Pat L.:

    A grey area but my tax/CPA guy sent me this on the $9,000 sewer repairs we had in 2016 & so far no objections from the IRS.

    Safe Harbor for Small Taxpayers

    Repairs can be deducted immediately if the total amount paid for repairs and maintenance on the property is less than or equal to $10,000 or 2 percent of the unadjusted basis of the property, whichever amount is lower. And the safe harbor is only available for businesses with revenues under $10 million and the property being repaired has an unadjusted basis under $1 million.

    & from the IRS website ....

    What is the de minimis safe harbor election?

    Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice).

    Thanks for posting this.

    I must be from a bygone era where I capitalized and depreciate everything. These days, when I install hot water tanks, room air conditioners, my CPA would expense them. So now large things that I don't expense, I list for him, and he decides whether to expense or not. He usually expenses.

    I used to depreciate things like hot water tanks, installed for $800.00 depreciate over 10 years, they break in 5 to 8 years, and I put in a new ones, and have to remember to expense the remainder of the old one, else, I would have two hot water tanks booked whereas it's physically one tank in the property.

    That's why I use a CPA to check on what I do as I couldn't keep up with the changes.

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