Do Code Violation Fixes on Rental Properties Count as Repairs?

[aarondmck]

Hello,

The roof of my rental property was not installed to the codes of the county. I've read that expenses to bring rental properties to code are considered repairs and not improvements:

https://www.rentprep.com/landlord-tips/rental-property-deductions/

To bring the roof to code would mean a full replacement of the roof. However, that seems to be at odds with the general consensus that roof replacements are improvements and not repairs.

Would my above scenario be an exception and the roof replacement be a repair and thus count against my rental income?

Please do not answer with a mere "yes" or "no". I need a solid case for either before coming to a decision as to whether this should go down as a repair on my Schedule E. If the answer is "yes", are there legal avenues to ensure the IRS is fully aware of this exception so it does not reek of suspicion on my Schedule E? I don't want to be a magnet for an audit by writing this large sum as a repair, even if it's legitimate and legally sound.

Thank you so much,

Aaron

[Anonymous]

can you provide a link to where you read that fixing a code violation is deductible.  it could be old case law that has been superseded by the IRS regulations  1.263.   

here's an link to an explanation

https://www.dbbllc.com/newsletters/focus/mar2012/irs-clarifies-capital-improvement-vs-repair-expense

note that short of a Supreme Court decision, the IRS is not bound by other court decisions.    and in some cases even the tax courts don't agree. an example is what is reasonable compensation which differs from court to court.  then there are cases the IRS constantly loses but continues to litigate every time.  

there is no absolute way to prevent an audit. your return might be one of those chosen by the IRS  at random

even the IRS auditor could matter.   some are more willing to listen to taxpayer arguments then others.  

even the time the agent has been on the job can matter.

[Critter]

Sounds like you have a reason to sue the roofer to be reimbursed for the corrections so you are made whole.

[aarondmck]

It's in the link I provided:

https://www.rentprep.com/landlord-tips/rental-property-deductions/

The key point to remember is that you cannot fully deduct upgrades and improvements unless they are necessary to keep the property in working condition. Examples include:

• Updating windows, door frames, etc. to match local code. This is OK because it must be done for the property to be livable.

After it says costs to match a property to code are deductible, it then says the following:

• Patching a leak in the roof is a necessary repair, but replacing the entire roof is an improvement.

In my case, I am wondering whether there's an exception to that rule as my roof replacement would truly be the cost to match local codes. The whole roof is not to code, yet a full roof replacement is not a "repair".

The link and words italicized above use the standard IRS definition of  "repair" to qualify costs to match local codes as deductible.

[aarondmck]

I do have reason to sue the roofer. However, the job was done before I purchased the property and no one knows who did it.

[Carl]

no one knows who did it

Really? Who told you that? You're being fed quite a line there. If the roofer was licensed, they had to pull a permit from the local county courthouse. So even if it was done 50 years ago, they have the permit application still, in the building codes department. If you make a concerted effort to find a permit and can prove that to the best of your knowledge and ability no permit was applied for, then the work was done by an unlicensed roofer and you can go after the seller you purchased it from under the disclosure laws.

But in reality, while I've been dealing in real estate for what is approaching 30 years now, I am no lawyer by any stretch of the imagination. So you need to seek legal counsel on this. Meanwhile on the tax front....

A new roof is a property improvement any way you look at it. It adds to your cost basis of the property, as I'm sure you know. You claim that as a repair on a rental property and you might as well hang out a sign that reads, "HEY! IRS! AUDIT ME NOW! I WANT TO PAY LOTS OF FINES, BACK TAXES, PENALTIES AND WHILE YOU"RE AT IT, CHARGE ME WITH FRAUD!"

Now I'm not saying who would win such a scenario; you or the IRS. Even though we know it would more than likely not be you, do you really need that headache right after shelling out $10,000 - $15,000 for a new roof?

By the way, I'm just curios on this. What prompted this? What happened that resulted in you getting inspected and cited by the county for this building code violation?

[aarondmck]

That's the problem. There's no permit on the roof. The seller "knows" nothing.

The roof has been leaking and that prompted me to do patching jobs. No one cited me for a violation. I was told by one of the roofers who did the patching that the whole roof was not built according to code. Now I need to replace the roof as the improper (non-permitted) install has now been realized to be the culprit of all the leaks.

In essence, the roof replacement is a job to bring the house to code (helps insurance too) and prevent leaks. Obviously, I will not write this against my income without having a strong case. The IRS seems too busy to answer technical questions, so I will ask later. If they confirm this is deductible, I'll have their words documented as there are other known pieces of the house that aren't to code (it's almost 50 years old).

In the end, this will very likely just be depreciated. But I'd still like to know if costs to amend code violations are known to be in a strict sense "repairs", so I'll followup with the IRS on that.

[Critter]

I highly agree this is a capital improvement that must be depreciated no matter why you had to do the roof ... this was not a "fix the roof" expense like patching the leaks it is a total roof replacement.

[Carl]

I can tell you right now that if the roof is more than 10 years old, replacing it is a property improvement regardless of the reason. Anyone telling you otherwise doesn't know what they're talking about. Besides, if that roof really is 50 years old like you say, stating that it doesn't meet the building code is a bit of a misnomer. I say that because *if* there were any such building codes for roofs 50 years ago, it probably met that code just fine. Additionally, any halfway descent lender would have paid for a home inspection on the house as a part of the mortgage application process, and would have required a 50 year old roof to be bought up to code before they would approve the loan. So there's something going on here that we're just not aware of at this stage.

Last rental I purchased (I have 3 now) was back in 2003. It's roof was approaching the 20 year mark and it was still in descent shape. It didn't meet the "current" codes of the time. But it did meet or exceed the code in effect back in 1983 when it was put on. *House was build in the early 70's) For me it wasn't the mortgage lender that was the issue. It was the insurance company. They said if I put a new roof on it, they'd basically cut my yearly premium in half. So after closing on the loan I had a roofer all lined up to start on it the next day. WHen done an insurance adjuster came out and inspected it. A few weeks later I got a rebate check from the insurance company for around $900 or so. Also back in 2003 the new roof on this 2 BR 1BA house only cost $4500. That same house today would cost arount $12,000 to replace the roof. As I type this I'm keeping a close eye on hurricane dorian since that roof while still in good shape, is approaching it's end of life (20 yrs). So there's always the possibility that new roof will only cost me my insurance deductible.

[aarondmck]

Sorry if I misscommincated that the roof was 50 years old. I was saying the house is about 50 years old (it was built in the early 60s) and, for that reason and the same reason for many of the other houses in the neighborhood, my rental property is not to code in at least several other respects. That's why I ask whether costs to amend code violations are tax deductible as I read (but in only one article albeit). It would be fair to know if adding another interior door to my rental property would be deductible as that would amend one of the local code violations.

There's no way the roof is 50 years old. The neighbors said it was last replaced 9 years ago, but there's no way to prove that. Also, the roof is not deteriorating due to age. As I said, a professional roofer found that the the roof was not done to code and that was the culprit for all the leaks. He also said to expect more leaks, and that has happened.

Yes, I indicated that replacing my roof will help with my insurance. I am expecting the premium to decrease after the new install, which will be to code and permitted. I'm in the same boat you were in this regard.

[aarondmck]

According to professional roofers, the replacement is an all out repair. I'm sure if more profession opinions were gathered, others would say it is not. Either way, they'd all agree the roof was not done to code. They'd also agree that's the culprit for all the leaks.

And so the question remains, are costs (whether it's a roofing replacement or not) to amend code violations deductible?

[Carl]

According to professional roofers, the replacement is an all out repair.

While I'm sure there are some out there, I don't know or even know "of" a single roofer who is a licensed tax professional that has a clue when it comes to taxes. I would not expect a roofer, professional or not, to know anything about tax law on this either.

I'm sure if more profession opinions were gathered, others would say it is not.

If referring to professional roofers, if they are true professionals they would advise you to seek the services of a tax professional, and would not give any opinion on any subject they were not educated in.

And so the question remains, are costs (whether it's a roofing replacement or not) to amend code violations deductible?

The question has been answered. Your new roof is a property improvement because it meets both requirements that make it classified as such.

 - The improvement becomes "a physical part of" the structure.

 - THe improvement adds "real value" to the property. In other words, when appraised by a qualified, certified, licensed property appraiser (not your county tax appraiser) they will appraise it at a higher value, then they would have before the new roof was installed.

Why you had to have the new roof put on is irrelevant. But there's no doubt it's a property improvement. Before the new roof was installed, in leaked. Now it doesn't. The property has without question, been improved. Again, as to "why" it was improved doesn't matter.

[Carl]

According to professional roofers, the replacement is an all out repair.

While I'm sure there are some out there, I don't know or even know "of" a single roofer who is a licensed tax professional that has a clue when it comes to taxes. I would not expect a roofer, professional or not, to know anything about tax law on this either.

I'm sure if more profession opinions were gathered, others would say it is not.

If referring to professional roofers, if they are true professionals they would advise you to seek the services of a tax professional, and would not give any opinion on any subject they were not educated in.

And so the question remains, are costs (whether it's a roofing replacement or not) to amend code violations deductible?

The question has been answered. Your new roof is a property improvement because it meets both requirements that make it classified as such.

 - The improvement becomes "a physical part of" the structure.

 - THe improvement adds "real value" to the property. In other words, when appraised by a qualified, certified, licensed property appraiser (not your county tax appraiser) they will appraise it at a higher value, then they would have before the new roof was installed.

Why you had to have the new roof put on is irrelevant. But there's no doubt it's a property improvement. Before the new roof was installed, in leaked. Now it doesn't. The property has without question, been improved. Again, as to "why" it was improved doesn't matter.

[aarondmck]

You are correct. No professional roofer is trying to define IRS terms here. I was saying the roofer sees it as a repair and in fact in need of repair due to the improper install. He said every nail has to be replaced to fix the problem that's causing the leaks. And he said had the roof been built to code, there'd be no problem.

Forget the roof. I read that costs to bring the home to code is deductible as a repair. Is that true? There are other parts of the house that aren't to code.

As for the roof, there is likely no case in court holding water for it being a repair. But somewhere in my heart I reserve that  it's a repair, even in IRS terms, unless costs to bring the property to code aren't deductible. 🙂