Is Roof Replacement a Capital Improvement?

Learn about whether or not roof replacement is considered a capital improvement and how it affects tax deductions.

Is Roof Replacement a Capital Improvement?

When it comes to accounting, a new roof to replace an old, worn out one may be considered a capital improvement. However, in common interest developments (CIDs), this is generally not the case. It is important to differentiate between repairs and capital improvements, as there is a fine line between the two. Painting, wallpapering, and redecorating are not considered capital improvements, but what about substantial repairs to a house? Generally, the answer is no, as the IRS does not consider work that restores something to its original condition, no matter how extensive, to be a capital improvement.

Replacing a few shingles on a leaky roof does not count as a capital improvement. On the other hand, if the entire roof is replaced, it is considered a capital improvement since it is not restoring the original condition. The same applies if the repair is structural in nature, such as replacing the foundation so that the house does not collapse. In order for repairs and maintenance projects to be tax deductible, they must first be capitalized.

This is especially true when the repair or maintenance improves the property or allows it to be adapted for a new use. The BRA test (which stands for Betterments, Restorations and Adaptations) is one way to determine this. Replacing a substantial part of any major component of a building meets the definition of a capital improvement. A roofing system is considered a major component because it plays an essential role in the operation of the overall building.

The following list is not exhaustive under tax deductibility regulations, but provides general guidance to help determine the tax treatment of incurred costs. Before making any decisions on deductibility of items listed below, it is important to assess your specific fact pattern in full. We won't go into all the details of these three safe harbours here, but official IRS guidance should be read by rental property owners who want to maximize their current year deductions. You'll also learn about how the IRS approaches capital improvements versus capital gains.

Of course, you may want to let your CPA handle this for you. This includes repairs to pre-existing defects prior to purchasing the property, such as hiring a roofing contractor to fix a damaged roof. Restorations are when something is restored to its normal state, such as replacing an entire roof. Building owners often spend significant amounts replacing parts of various components of their roofing system.

If you need a roofing company this spring, State Roofing can help with your home improvement needs. You can improve on the original value by changing the grade of materials (for example, going from an asphalt shingle roof to a metal roof or from EPDM to PVC on the commercial side). You can also improve on the original value by improving the grade of material beyond its original value. If so, then the extension part of the roof must be capitalized and possibly even the entire roof system depending on the facts. For example, if you replace an entire roof with metal instead of asphalt shingles, you would be increasing its original value rather than performing a necessary step to maintain it.

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