Author Topic: Chimney replacement: repair or improvement?  (Read 234 times)

LucyWreck

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Chimney replacement: repair or improvement?
« on: August 11, 2017, 07:23:30 AM »
We recently had a crumbling masonry chimney on our 124-year-old two-flat removed and replaced with a simple modern metal chimney. Our property is divided between our owner-occupied section and a rental unit, so I can apply some of this cost toward rental expenses (no matter what, a portion is attributable to our non-rental home, so I'm only looking at a part of the cost in any case).

But I'm scratching my head... should I consider this a repair (and deduct it as-is), or an improvement (and depreciate it)?  A roof repair counts as a repair... but "duct work" is supposed to be capitalized.

Considerations:
  • The crumbling chimney was damaging the roof (pulling up a chunk as the whole thing leaned), so a roof repair/patch was a big part of the work; repair!
  • The reason the chimney was crumbling is because the previous owners did a tear-off roof replacement and finished the attic... and it appears the contractors removed the chimney structure from the attic and didn't reinforce properly; this sounds like a "betterment" because we fixed a pre-existing defect or condition; makes me think capitalization!
  • The work wasn't done just for fun or to improve property values; the leaning chimney and attendant roof damage created a leak visible inside. This makes me think repair again.
  • Cost of the repair was about $2800; amount apportionable to the rental unit is about $1000. I know the cost of the item isn't supposed to matter...
  • We run a tax loss on the rental at the moment, but our income means those losses are disallowed. So in any case, we're just banking suspended passive losses for a future year with less income. Again, this shouldn't matter in the determination, but noting it just for color.

Thoughts?

YttriumNitrate

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Re: Chimney replacement: repair or improvement?
« Reply #1 on: August 11, 2017, 09:41:49 AM »
  • Cost of the repair was about $2800; amount apportionable to the rental unit is about $1000. I know the cost of the item isn't supposed to matter...
Oh, but the cost does matter...
http://www.rentalsoftware.com/real-estate-income-taxes/2500-de-minimis-safe-harbor/
Expense that $1000 if you want.

LucyWreck

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Re: Chimney replacement: repair or improvement?
« Reply #2 on: August 11, 2017, 01:07:20 PM »
Ah, I totally did not know about this "safe harbor" rule. Thanks!

Drifterrider

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Re: Chimney replacement: repair or improvement?
« Reply #3 on: August 14, 2017, 07:20:54 AM »
If a single chimney serves both properties, I'd expense the whole amount to the rental unit.  You can't repair "half" of the shared chimney.

LucyWreck

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Re: Chimney replacement: repair or improvement?
« Reply #4 on: August 14, 2017, 03:30:49 PM »
My understanding (though I'm new to this, and can be corrected if I'm off-base) is that expenses shared by the building must be apportioned to the rental unit and the owner's unit as a %, by floor space.

It's a 3-story building; I live on the 2nd and 3rd floors w/ the rental on the 1st floor. 1 roof/1 chimney to rule us all. Floor space split is 62%/38% (square footage on 3rd floor isn't as big as the other floors since it's a finished attic). If I fix something in just the rental unit (eg, replace an electrical outlet), I call that a rental expense at 100%. But the chimney (like the basement, the garage, the front porch...) is used by both the rental unit and my unit. If it were a SFH that I owned and occupied, I could not deduct the cost of a repair... so the portion of the chimney that I allocate toward me is not tax-deductible; the portion that I allocate toward the rental is deductible.

Eh?

SeattleCPA

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Re: Chimney replacement: repair or improvement?
« Reply #5 on: August 14, 2017, 04:22:58 PM »
If a single chimney serves both properties, I'd expense the whole amount to the rental unit.  You can't repair "half" of the shared chimney.

This isn't right. Sorry.
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