Replacing damaged carpet with LVP in a rental - expense or depreciation on Schedule E?

[streampaw]

The tenants damaged basically all the floors in the rental apartment. The sheet vinyl and carpet were ripped out in a lot of parts. The floors need to be replaced because they're beyond repair due to damage. However, instead of putting in carpet and sheet vinyl, I'm choosing to put in LVP and do some DIY work to make it cheaper. Is the amount I spend on replacing the floors tax deductible as an expense, because the old carpets/vinyl was beyond repair? Or is it a depreciable expense where I have to amortize it over some years because I'm getting new LVP which "improves" the apartment? 

Also, is painting the interior an expense? Thanks. 

[Bsch4477]

Paint and floor replacement are repairs as opposed to capital improvements. 

[Mike9241]

did you have insurance that would cover all or part of the damage?  the reason. the IRS has denied deductions for repairs where the taxpayer could have filed an insurance claim but didn't for various reasons.  

[Carl]

I am not in agreement with @Bsch4477 .  Repairing the floor and replacing the floor are two totally different things. As I read and understand your post, you are putting in new flooring throughout the property. You have specifically stated that the floors are "beyond repair". Therefore, your new flooring is a property improvement that adds to the cost basis. It should be capitalized and depreciated over time. Also, going from carpet to LVP flooring unquestionably "improves" the property, and definitely adds value.

Painting is a maintenance expense.  I myself paint all of my rentals between tenants, or every 5 years - whichever occurs first. It's a maintenance expense that does not have any effect on the value of the property.

[Bsch4477]

@Carl is correct. Note that you must subtract any insurance reimbursement from the cost of the capital improvement. 

[Carl]

you must subtract any insurance reimbursement from the cost of the capital improvement.

Not so in this case. Remember, the insurance premiums paid were tax deductible. Therefore, any insurance payout is reportable as rental income. Therefore, it's included in the total rental income received for the year. Then the portion of that income used for the property improvement is capitalized and depreciated.

Though this is not always true 100% of the time (exceptions are not that common), the general rule is, any income received from any source for any reason pertaining to rental property, is included in and reported as rental income. This usually does include any insurance payout, since the insurance premiums were deductible as a rental expense. But even so, the total cost of the improvement adds to the cost basis of the property (structure only in this case, which is why it's entered as a physically separate asset with a land value of $0)

Overall, you reduce your original cost basis by the value of the loss, then increase that reduced cost basis by the value of the improvement. Since reducing the cost basis on an asset in TurboTax is complicated, requiring the user to jump through hoops of fire over a boiling pit of lava, it's generally easier/simpler to give the property improvement a value equal to the increased value of the property that is above it's original cost basis, and just leave that original entry alone.

[Anonymous_]

See https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/i-received-17-874-10-...

See also https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/rental-property-is-an...

See further https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/where-do-i-report-a-p...

[Carl]

@Anonymous_ those are just other forum posts. But I stand corrected, as I see where my misunderstanding came from. I found it in IRS Pub 527 page 8, to wit:

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.

So if you decrease the basis by the amount of insurance paid out, that will account for that insurance payout in the long run down the road when the property is sold.

Whereas if the insurance payout exceeds the cost of the repair (not all that common, but not unheard of either), then the excess payout is reported as rental income. If I recall correctly, there's a specific form that is used for reporting the excess. Not sure if it applies to rental property, or if you just include the excess payout in the total rental income received for the year.

[Anonymous_]

If the insurance proceeds exceed the cost of repairs, the gain is calculated on Form 4684 and reported on Form 4797 (the excess is not reported as rental income on Schedule E).

If the insurance proceeds equal to cost of repairs, the proceeds do not need to be reported at all and no adjustment needs to be made in the basis of the property. If a taxpayer wants to report the proceeds, then the concomitant expense can be deducted (so it is a wash).

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@Carl wrote:

@Anonymous_ those are just other forum posts. But I stand corrected, as I see where my misunderstanding came from. I found it in IRS Pub 527 page 8, to wit:

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.

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That is basically half the story with respect to proceeds, If the entire proceeds are used for restoration of the property, the basis is not decreased. 

There could be some sort of "fiction" where basis is decreased to the extent of insurance proceeds received but then basis is increased by the amount of those proceeds spent on restoration.