Cracked Shower Pan causing Full Bathroom Remodel in Rental

[kg54914]

I've found mixed answers on similar questions so thought i would ask with our specific scenario.

We had a cracked shower pan in our rental property and since the old 1980's tile was used everywhere on  the floor and walls we were required to complete a full remodel to demo tile, replace pan and subfloor, and retile.  Total expense was ~$12,000.

Is this considered a rental repair or do i categorize it as depreciation?

[DoninGA]

Did this increase the value of the rental or extend the life of the rental?  Or did this just maintain the value of the rental or maintain the life of the rental?

Increase the value or the life of the rental? - It is an improvement to the property to be added as an asset with a recovery rate the same as the rental property - 27.5 years

Maintain the value or life of the rental? - Repair

[Carl]

It's a property improvement any way you look at this. It has to be capitalized and depreciated over 27.5 years. If you claim a $12,000 repair expense, I can guarantee you with 100% certainty that you will be audited 24-36 months after filing it as a repair, and you will lose that battle with the IRS.

[Flatcat101]

What is the verdict on this?  , similiar situation here.  HVAC went out, leaked all over the carpet and into the pad where it molded...(they didn't notice the wet carpet for whoever knows how long).  Ended up having to go with new HVAC because they don't make the one bad part for one we had, and also new flooring in the area around the HVAC and surrounding area.   We did do the other half of the house too, and I understand that's an improvement, but wouldn't the HVAC and half of the flooring be a repair?   We didn't have another option other than a new system for the HVAC fix, just like this guy and the bathroom.  

[AnnetteB6]

The new HVAC on its own is not considered a repair unless you had been able to fix it with the part that was no longer available.  As such, the new unit must be depreciated as an improvement with a 27.5 year recovery period.  

The flooring around the just the area of the HVAC may be considered a repair by itself depending on how significant the area was as compared to the rest of the house.  However, if it was replaced the same time as the other half of the house, it may make sense to combine all of the new flooring together as one improvement.  

[Carl]

What is the verdict on this?

There is no "verdict" per-se. The IRS has clear-cut definitions.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.