A; Appreciate the question Chris, and it's a good one. Understanding when you can capitalize versus expense can be tricky.
Is it a personal residence or an investment property?
The answer to your question differs depending on if it’s a personal residence, a residential rental, or a commercial property.
Chris, if this new roof is on your primary residence, the cost is not deductible as an expense for 2020. Instead, it will increase the cost basis of your home, which would be recovered upon the sale of your home. For example, if the cost basis of your home was $500,000 prior to installing the new roof, your cost basis will now be $511,700. Thus, the amount you’ll pay in capital gains will be reduced (assuming you sell the house for more than you bought it for).
If the new roof went on a residential investment property, you’ll be capitalizing the cost of the new roof and depreciating it over a 27.5 year recovery period. If it’s a commercial property, you’ll be depreciating it over 39 years. This is what you’ll do this year when you file your taxes for 2020.
However, if the roof were to cost less than $10,000, you might be able to expense the full amount based on the IRS’s safe harbor election for small taxpayers.
Still in doubt?
It can never hurt to talk to a qualified tax accountant who knows the ins and outs of your situation to advise you on the best course of action.
The Millionacres bottom line
If you paid for a new roof this year, it’s either going to be added to your cost basis or you’re going to have to capitalize it and depreciate accordingly (unless you qualify for the safe harbor election). If there’s any sort of grey area though, your best bet is to talk to a qualified tax accountant.
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