However, there are some exceptions to this rule. The IRS allows certain improvements made to rental properties to be eligible for Section 179 deductions if they meet specific criteria. Some examples of qualifying improvements include: Roofs.
The Intersection of Section 179 and Roofing
A pertinent question here is, "Are roofing projects eligible for Section 179?" The answer is a resounding yes.
If you own a rental home, you can write off any roof repairs as a deduction. However, replacing the roof counts as home improvement, not a repair, since it adds substantial value to the property.
Roofs do qualify for Qualified Improvement Property (QIP) status, allowing property owners to deduct the costs of roof repairs and replacements as business expenses. This can provide substantial tax benefits, as such expenses are fully deductible in the year incurred.
The IRS allows you to depreciate certain assets that you use in your rental business over a set period of time. In the case of a roof, the useful life is typically considered to be 27.5 years.
Improvements are depreciated using the straight-line method, meaning that you must deduct the same amount every year over the roof's useful life. The IRS designates a useful life of 27.5 years, so divide the total cost of the roof by 27.5 to reach the amount you can deduct each year.
To qualify for the Section 179 deduction, your property must have been acquired for use in your trade or business. Property acquired only for the production of income, such as investment property or rental property (if renting property is not your trade or business), and property that produces royalties do not qualify.
However, under the TCJA the qualifying property for Section 179 expensing has been expanded to include the following improvements to non-residential real property: roofs, heating, ventilation, air conditioning, and fire/alarm protection systems.
While a roof repair would have been considered a maintenance expense, the necessary replacement has just become a capital expenditure.
Most roofs typically depreciate at a rate of 5% per year from the date of purchase or installation. This means that an older roof will have a lower replacement cost value, leading to lowered claim payouts in case of damage or need for replacement.
Were new roof shingles eligible for a tax credit? If you are replacing your roof, the cost of materials can be claimed as a tax credit to the amount allowed by law (see above). If you are simply replacing or repairing certain shingles, that does not qualify for a tax credit.
Schiff: Section 179 allows business owners to deduct the purchase price of equipment and/or software put into service during the year. In order to qualify for this tax deduction, the equipment must be placed into service on or before Dec. 31.
These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. You can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property.
The Tax Cuts and Jobs Act of 2017 made significant changes to both Section 179 and bonus depreciation. These changes continue to be in effect for 2024 and when used together may allow businesses to deduct up to 100% of capital purchases.
Roof replacement deductibles typically cost between 1%-5% of your home's insured value. Say, for instance, your home is insured at $100,000, the deductible might cost between $1,000-$5,000. However, all of this depends on your unique policy. Some insurance plans have higher deductible costs than others.
What's New for 2023. Section 179 deduction dollar limits. For tax years beginning in 2023, the maximum section 179 expense deduction is $1,160,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,890,000.
Basically, the Section 179 tax deduction gives property owners the option of deducting the total cost of a roof replacement in the year it was installed, rather than depreciating it over nearly four decades. As of 2022, the deduction limit was raised to $1,080,000.
A roof replacement can fall under the category of home improvement if it meets the IRS criteria for a capital improvement. If your roof replacement increases your home's value, extends its useful life, or adapts it to a new use, it may qualify as a tax-deductible expense.
Roof Replacement Now Qualifies as Qualified Improvement Property in 2024 & 2025 Announced by Harbor Financial. The IRS has officially confirmed that roof replacements are now classified as Qualified Improvement Property (QIP).
While you can claim a Section 179 deduction for most kinds of property or assets, there are some types of assets that don't qualify: Real property – Buildings, land and land improvements (this includes swimming pools, paved parking areas, docks, bridges and fences) Air conditioning and heating equipment.
Section 179 allows the most flexibility in deferring expenses to future tax years as you can choose the exact amount to apply for the first year, with the rest depreciated normally over the useful life defined by the IRS. Bonus depreciation has to be applied to all new assets that fall into the asset class life.
Flooring, fixtures, sidewalks, fences are some examples of these type of assets. Not only will these assets have shorter depreciation lives, but some will even qualify for bonus depreciation.
Improvement and Remodeling Expenses for Rental Properties
Unfortunately for property owners, these big-ticket expenditures aren't deductible maintenance expenses. As a property owner, you can only deduct routine maintenance costs.
Section 179 eligible property includes:
Property listed under MACRS (the modified accelerated cost recovery system) with a recovery period of no more than 20 years.
Depreciation expense taken by a real estate investor is recaptured when the property is sold. Depreciation recapture is taxed at an investor's ordinary income tax rate, up to a maximum of 25%. Remaining profits from the sale of a rental property are taxed at the capital gains tax rate of 0%, 15%, or 20%.