@alien3 wrote:
This is a two part question;
1) We live in a federal declared disaster area (Dallas) due to the freeze in January 2021.
We own two rental houses that sustained major freeze damage to the pool equipment that cost approximately $10,000 each to repair.
Do I list these expenses on Schedule E as a repair expense, or somewhere else?
2) One of the rental houses central air conditioning unit went out and required replacement.
Do I list these expenses on Schedule E as a repair expense, or somewhere else?
You first have to understand the difference between a repair and an improvement. An improvement adds value or extends the useful life of the property, while a repair restores the property to as-was condition. A new AC condenser sounds definitely like an improvement because it extends the life of the cooling system. For the pool, it depends on what was actually done. A replacement of major components would probably be considered to extend the useful life, but only you know what was done.
Second, did you have insurance coverage? You can only declare a casualty loss for the amount not covered by insurance--if you have insurance but don't make a claim, you can still only deduct the amount that you would have paid after making a claim.
Next, let's think about a casualty loss. The amount of the casualty loss is not necessarily the cost of repair, the amount of the loss is the loss in property value (determined by an appraisal) considered before and after the storm. If you restore the property to its previous condition, the cost of restoration will usually be accepted as the amount of the loss. If you restore the property to better condition, then cost of restoration is not a fair estimate of the loss in value. Your property doesn't have to be completely destroyed to have a casualty loss, it just has to lose value.
https://www.irs.gov/pub/irs-pdf/p547.pdf
Next, you have the option to deduct a 2021 casualty loss on your 2020 tax return, if that would create some advantage for you. See the instructions to form 4684, and you would have to file an amended 2020 tax return to do this. Or you can take the loss on your 2021 tax return. The amount of deduction is the loss in fair market value due to the disaster, which might be the cost of restoration.
https://www.irs.gov/forms-pubs/about-form-4684
Deducting the casualty loss also subtracts that amount from your property's adjusted cost basis, which will affect future depreciation calculations.
Then separately, the cost of restoration improvements are added to the property's cost basis as an asset or improvement and you begin taking depreciation. The cost of restoration repairs are a rental expense on the tax return for the year in which they were actually paid.
