Rental Property Roof Replacement - timing of multiple insurance claim payments and multiple payments to roofing company spread out over 2 years

[LRC25]

My rental property was damaged by hailstorm in 2023. I received insurance settlement payments, and made payments to the roofing company for a full roof replacement. From IRS publications and other community posts I understand that the insurance settlements should be taken as Schedule E income (in the year(s) the settlements were received) and cost for the roof replacement (payments to roofing company) should be depreciated over 27.5 years.

However it's a bit more complicated. Insurance settlement was received in multiple/partial payments over 2 years (2023-2024). Partial payments to the roofing company were also spread out over the same 2 years.

And it's even more complicated... The insurance claim/settlement included not only roof replacement, but also re-painting the exterior of the house plus replacement of one window (frame and all), both damaged during the hail storm. The roofing company also handled the re-painting and window replacement (subcontracted them out). Roofing company payments/invoices didn't separate out roof vs. painting/window - timing of the multiple roofing company invoices/payments was based on when I received the partial settlement checks from insurance company. Roof replacement was completed in 2023, exterior re-painting and window replacement completed in 2024. Even though roofing company invoices didn't itemize, I can refer to insurance claim documents to figure out cost for roof vs. exterior re-paint vs window.

My questions:

I'm fairly sure the cost of new roof needs to be depreciated (27.5 years) starting the date the new roof was put into service (roof replacement completed). My question here is: if the new roof went into service in 2023 but some of the payments for it were made to the roofing company in 2024, would I ignore the timing of payments to roofing company and simply start depreciating the full cost of roof replacement from the 2023 "placed in service" date?

Hypothetical question: If I was filing my 2023 taxes, with new roof completed in 2023, yet roofing and insurance companies were still haggling over the final roof replacement cost, how could I file my 2023 tax return with the correct depreciation amount? (since I wouldn't yet know the full/final cost of the asset placed in service). What's the procedure for a situation like this?

What about the exterior painting and window replacement? Since exterior painting and window replacement were undertaken to repair hail storm damage and restore exterior paint and window to prior condition, can these items be expensed as repairs? And what year would they be expensed given blurry timing between when I paid the roofing company vs. when these repairs were actually completed?

Thanks in advance for your help!

[AmyC]

1. It is 2025 so you know the full cost of the roof and can file or amend your 2023 return with the roof and cost.

2. No to paint and windows. You state that windows and paint were done in 2024 so they go on your 2024 return.  Painting is a maintenance expense. The windows get tricky. If insurance paid for the windows, you don't need to capitalize, since you didn't pay for them. However, if insurance paid you and you paid for the windows, you do need to capitalize.

Capitalize vs repair:

If the windows were replaced due to storm damage and are considered a capital improvement (i.e., they improve the property), you would typically capitalize the cost and depreciate it over time. If it’s merely a repair (like fixing broken windows without changing them), you might be able to deduct the cost in the year incurred.

Reminders from Pub 527: 

Decreases to basis.

You must decrease the basis of your property by any items that represent a return of your cost. These include the following.

• Insurance or other payment you receive as the result of a casualty or theft loss.

Gain from casualty or theft.

It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. Generally, you must report this gain. However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. To do this, you must generally buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Pub. 547 for more information. The cost of the replacement property must be equal to or more than the net insurance or other payment you received.