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Depreciation & Recapture

Question: We have incurred costs for substantial work on our residential rental property. We replaced the roof with all new materials, replaced all the gutters, replaced all the windows and doors, replaced the furnace, and painted the property’s exteriors. What are the IRS rules concerning depreciation?

Answer:

Replacements of the entire roof and all the gutters, and all windows and doors of your residential rental property:

  • Are generally restorations to your building property because they are replacements of major components or substantial structural parts of the building structure. As a result, these replacements are capital improvements to the residential rental property.
  • Are in the same class of property as the residential rental property to which they are attached.
  • Are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention as residential rental property.

Repainting the exterior of your residential rental property:

  • By itself, the cost of painting the exterior of a building is generally a currently deductible repair expense because merely painting is not an improvement under the capitalization rules.
  • However, if the painting directly benefits or is incurred as part of a larger project that is a capital improvement to the building structure, then the cost of the painting is considered part of the capital improvement and is subject to capitalization.
  • In this case, the painting is incurred as part of the overall restoration of the building structure. Therefore, the repainting costs are part of the capital improvements and should be capitalized and depreciated as the same class of property that was restored, as discussed above.

Replacement of the furnace in your residential rental property:

  • Is generally a restoration to your building property because it is for the replacement of a major component or substantial structural part of the building’s HVAC system. Therefore, the furnace replacement is a capital improvement to your residential rental property.
  • As with the restoration costs discussed above, these costs are in the same class of property as the residential rental property to which the furnace is attached.
  • Is generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention as residential rental property.

Note: A taxpayer whose average annual gross receipts is less than or equal to $10,000,000 may elect to not capitalize amounts paid for repairs, maintenance, or improvements of certain eligible building property if the total amounts paid during the taxable year for such activities do not exceed certain dollar limitations. For more information, see Safe Harbor Election for Small Taxpayers in Tangible Property Regulations - Frequently Asked Questions.

Additional Information:


Category: Sale or Trade of Business, Depreciation, Rentals
Subcategory: Depreciation & Recapture

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224