I have an off the grid rental property that needed the road to the house repaired (weather and use washed away gravel and made it almost impassable in areas). It totaled around $3,700 for everything, including gravel, grating and labor.
Is this a write off, a depreciated expense or not a write off at all?
Hi Bill,
Could you please point me to where land improvements are addressed in the tax code? I am trying to understand better why a "repair" over $2,500 to an existing gravel road/driveway would have to be capitalized instead of expensed. If the original road/driveway was unpaved, I am also wondering if that original driveway could have been expensed instead of capitalized. Any further help you can provide would be appreciated.
Assuming this work was done on either land that you own, or land that you have an easement right to, I see this as adding to the cost basis of the property. Specifically to the value of the land - and you already know that land is not a depreciated asset. So I'd simply enter it as a land improvement. That will add to the cost basis of the property without forcing you to take depreciation on it. I'm assuming you don't want to depreciate it anyway, since depreciation recapture can hurt in the long run when you sell or otherwise dispose of the property.
If you want, you can separate things out. For example, the stuff you paid for and own, (such as the gravel) I would total up and call that the land improvement cost to be entered in the assets/depreciation section. For the things you paid for but don't own (equipment rental, labor, etc) I would total that up and claim it appropriately in the rental expenses section. Take note that doing this may require you to issue a 1099-NEC for the labor costs, unless you paid a business (as opposed to paying an individual) for the labor.
I disagree as to the comment it is an addition to basis of the land - this definitely has a useful life and is required to use the land for rental purposes.
I would treat this as a repair and expense it (if not you could do 100% bonus depreciation), per IRS Pub 946 :
How Do You Treat Repairs and Improvements?
If you improve depreciable property, you must treat the improvement as separate depreciable property. Improvement means an addition to or partial replacement of property that is a betterment to the property, restores the property, or adapts it to a new or different use. See section 1.263(a)-3 of the regulations.
You generally deduct the cost of repairing business property in the same way as any other business expense. However, if the cost is for a betterment to the property, to restore the property, or to adapt the property to a new or different use, you must treat it as an improvement and depreciate it.
I believe the above answers are very good responses, in answering where you might find more information in the Tax Code...see below.
I believe that one could make a case for either expensing or capitalizing the upgrade to your road.
IRS Publication 527 and IRS Publication 535 should be of benefit to your answer.
IRS publication 527 addresses this question in Chapter 1.
Repairs and Improvements:
Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.
Improvements:
You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.
Betterments:
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Safe harbor for routine maintenance:
If you determine that your cost was for an improvement to a building or equipment, you still may be able to deduct your cost under the routine maintenance safe harbor. See Pub. 535 for more information.