Rental roof partial disposition

[saltydogflorida]

I replaced a rental property roof damaged in the hurricane. I have added the new roof as a new asset for depreciation. I would like to use partial disposition (old roof is currently depreciated as part of the entire property) or casualty loss for the old roof for 2022 taxes. I believe either option would then require a change to the basis/depreciation of the entire property that was originally purchased and depreciated starting in 2014. I cannot figure out how to change my basis for the main property asset going forward. If I add a new asset it restarts the depreciation at 27.5 years which does not seem right.

[Carl]

I would like to use partial disposition (old roof is currently depreciated as part of the entire property) or casualty loss for the old roof for 2022 taxes.

If the old roof was not listed as it's own individual asset, then you can't do what you want. If you change the cost basis of the property asset (which includes the old roof) you will totally screw up the depreciation history, as well as future depreciation going forward. Leave it alone unless you are prepared for an audit which you will most likely. lose.

If I add a new asset it restarts the depreciation at 27.5 years which does not seem right.

It is exactly right. Depreciation on the new roof starts on the date it was placed in service, for a period of 27.5 years from that date. Typically, this is one day after the work is completed, assuming the property was classified as a rental while the work was being done.

[saltydogflorida]

Thanks, Carl. Sound like partial disposition is a no-go.

If I treat the roof as a casualty loss, do I just keep depreciating the entire property (including the old roof) like normal? Then the decrease in basis (from the loss) would be taken into account upon sale?

[Carl]

If I treat the roof as a casualty loss, do I just keep depreciating the entire property (including the old roof) like normal?

As I understand things, your old roof is not listed as a physically separate asset and never was. You can't "treat it like a casualty loss", because it's not a casualty loss. A casualty loss would be something like a fire, hurricane, or tree fell on the house totally destroying the roof in one fell swoop. Your roof replacement is because of normal wear and tear, or (more likely) your insurance company requirements where they're going to drop coverage if the roof is over a certain age. (10 years for some, 15 for others).

Then the decrease in basis (from the loss) would be taken into account upon sale?

There is no decrease in basis. A decrease would be the last thing you'd want anyway, as a decrease in basis would increase your taxable gain upon sale of the property.

I know you're trying to reduce the depreciation you're required to take, and I understand why. But it just doesn't work the way you want it to unfortunately.

[Carl]

If I treat the roof as a casualty loss, do I just keep depreciating the entire property (including the old roof) like normal?

As I understand things, your old roof is not listed as a physically separate asset and never was. You can't "treat it like a casualty loss", because it's not a casualty loss. A casualty loss would be something like a fire, hurricane, or tree fell on the house totally destroying the roof in one fell swoop. Your roof replacement is because of normal wear and tear, or (more likely) your insurance company requirements where they're going to drop coverage if the roof is over a certain age. (10 years for some, 15 for others).

Then the decrease in basis (from the loss) would be taken into account upon sale?

There is no decrease in basis. A decrease would be the last thing you'd want anyway, as a decrease in basis would increase your taxable gain upon sale of the property.

I know you're trying to reduce the depreciation you're required to take, and I understand why. But it just doesn't work the way you want it to unfortunately.

[micwebnet]

Partial Asset Disposition is covered well here: https://www.thebalancemoney.com/partial-dispositions-3192873. Roof is the example they use. From the article:

What Are the Benefits? 

You've disposed of the old roof—it no longer exists—but since you aren't selling it, there are no gross proceeds. The gain on the disposition will therefore be zero proceeds minus the remaining cost basis, which means you have a loss.

That's a negative income number that reduces your total income, adjusted gross income, and taxable income. When losses decrease income, they do so for purposes of measuring passive activity losses, the net investment income tax, the additional Medicare tax, the alternative minimum tax, and a whole range of other income-sensitive calculations.

Then, there's the accumulated depreciation. You remove both the cost and the accumulated depreciation from the original asset when you dispose of a partial asset. You get a currently deductible loss right now, and you have less depreciation to recapture if and when the property is sold in the future.

Question then is how to achieve this in TurboTax for an existing rental property.

Thanks,  Michael

[RobertB4444]

Assuming that you have your rental home already entered and depreciating in TurboTax then you would have to create a new, separate asset for the roof.  You need to figure out the percentage of value that the roof has as part of your rental home and then remove that percentage of the old asset and turn it into a new asset called 'roof'.  Once you have created the new asset and moved over its percentage of depreciation and everything you can dispose of the old asset at a loss and create another new asset called 'New Roof'.  

@micwebnet