Should cost of mandatory earthquake retrofitting for business property in SF, CA, be considered capital improvement or repair? Where do I take the deduction?

[alexcat100]

I own an office in a small condo and had to pay a share of the mandatory retrofitting of the entire building. Structural repairs were required by the city and as far as I know they do not increase the value of the property.  How do I deduct this expense?

[PatriciaV]

The IRS ruled in 2012 that Earthquake Retrofitting is considered a "betterment", ie: improvement.

IRS Internal Revenue Bulletin:  2012-14
Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property

"Earthquake retrofitting encompasses various factual scenarios and could involve substantial structural additions that strengthen the unit of property and that may constitute betterments under the temporary regulations. Also, the temporary regulations retain an example from the 2008 proposed regulations that illustrates that certain amounts paid to strengthen a building to make it safer in the event of an earthquake may constitute a betterment to the unit of property."

Under the IRS rules, a property is improved when it undergoes a "betterment," an "adaptation," or a "restoration." Each of these terms are defined in the IRS rules. In simple terms, any expenditures that improve the property must be capitalized and depreciated. These costs add to the property basis and are entered under the Assets/Depreciation section of Rental Property in TurboTax.

A repair is any expenditure that is not an improvement. These costs are entered under Repairs in the Rental Property Expenses section of TurboTax.

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