Proper use of deductions on business property can save you significant money at tax times. One major deduction for business properties is depreciation. This accounts for the decline in value of the property over time. Capital improvements, such as a new roof, are depreciated independently of the building itself
Depreciation is an accounting term that tracks the decline in value of an asset over time. While this may seem counter-intuitive as real estate is generally an appreciating asset, depreciation recognizes that a property is less useful as it ages. To claim depreciation you must own the property, use it for business, be able to determine its useful life, or recovery period, and expect it to last longer than one year.
Straight-line depreciation is the most straightforward method for calculating a new roof's depreciation. Once the roof is in place, it begins to lose its value. The depreciation is the same for each year of the roof's useful life. Since the roof is newer than the structure itself, the roof will technically lose its value after the building. While this is fine for accounting purposes, it won't convince a buyer to purchase a decrepit building with a newer roof.
Straight-line depreciation is calculated based on the Modified Accelerated Cost Recovery System (MACRS) utilized by the Internal Revenue Service. MACRS dictates the recovery period of a piece of real estate based on its primary use. You will depreciate a residential property over 27.5 years and a commercial property over 39 years. These figures will be used to calculate the depreciation.
Depreciating a New Roof
A new roof is considered a capital improvement and, therefore, subject to its own depreciation. For example, if you've owned a rental property for 10 years before you installed a new roof, you can depreciate the roof over 27.5 years, even though you have 17 years of depreciation left on the property. For example, if the new roof costs $15,000, divide that figure by 27.5. This means the roof depreciates $545.46 every year. You must also take into account the month the roof is installed for the first year. For example, if you install a new roof in August, you can claim four-and-a-half months of depreciation for the first year. Divide the yearly depreciation of $545.46 by 4.5. You can claim $121.24 for that first year.
Is Roof Replacement Considered Capital or Expense?
According to IRS Regs. Sec. 1.263(a)-3(d), the expenses you paid to fix your roof can only be capitalized if they meet one of three conditions:
1-Better the roof, improve it beyond its original state
2-Restore it to a like-new condition
3- Retool the building for a different use
A roof replacement will usually satisfy at a minimum the second condition, which means in most cases, you can consider a full roof replacement a capital investment. However, many repairs do not meet these qualifications, and they would only qualify as expenses.
There are some exceptions to this rule that you should keep in mind before claiming a deduction for your roof. For one, if you are simply repairing some damage your roof sustained over the year such as a piece of debris falling through it, the IRS may count this as a repair instead of a capital improvement. Your repair may also count as a betterment if you replace it soon after buying your building such as within a year or two, but if you replace it afterward, it may simply count as general maintenance unless the roof represents a substantial improvement on the original.
Can I Deduct a New Roof?
In most instances, a full roof replacement will count as a capital improvement since it will improve the building as a whole or at least restore it to a like-new condition. If your roof meets these qualifications, the IRS allows building owners to deduct the cost of their new roof in the form of capital depreciation. You’ll be able to claim the amount that your roof depreciates over the course of the year as an itemized deduction when you next file your taxes.