My step-son owns a triplex that was built in 2009. Each unit has a lower level with steps going down to it. In 2009 the steps were to code (building code). Since then, the building code has changed and now the stairs were deemed to be too steep. It cost around $10,000 per unit to correct the unsafe condition. The resulting change eliminated floor space on the main level of each apartment so the work did not increase the value of the property (we don’t see it as an improvement).
My question is, can the entire cost of the project be classified as a repair?
Any thoughts would be appreciated.
IRS Pub 527 states;
Repairs and Improvements
Generally, an expense for repairing or maintaining your rental property may be deducted if you
aren’t required to capitalize the expense.
Improvements. You must capitalize any expense you pay to improve your rental property.
An expense is for an improvement if it results in a betterment to your property, restores your
property, or adapts your property to a new or different use. Table 1-1 shows examples of
Betterments. Expenses that may result in a betterment to your property include expenses
for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Restoration. Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation. Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.
While I understand making the steps less steep took a few square feet of floor space, are you sure the floor space from a tax, legal or real estate view point has changed? It is my understanding the real estate and property tax square footage would not have changed.
… are you sure the floor space from a tax, legal or real estate view point has changed?
The laundry room had to be eliminated and the washer and dryer hookups moved into the master bedroom walk-in closet. Hardly an ideal setup.
The value of the property might not have increased, but I do still see it as an improvement because safety was improved, so this was a “Betterment … fixing a pre-existing defect or condition, … increasing the … quality of your property.”
(1) Wow. Typically when building codes change, they’re not enforced retroactively. The rules must be more strict with multifamily rentals than single-family owner-occupied, because there are millions of old houses with steep stairs and other violations still in service.
(2) Or, as the cynic in me suspects, the inspector was fishing for a bribe, in which case kudos to your stepson for calling his bluff.
(3) Or the inspector was an over-enthusiastic newbie, and will eventually be reined in by his seniors after enough of his dicta are overturned via lawsuits.
I’m not an expert in this at all. Just sharing my opinion. Based on the the Pub 527 excerpts in the OP’s post and my experience with building codes, it seems that correcting the stairs to reflect current building code requirements would be considered a “betterment” of the property (i.e., fixing a pre-existing defect or condition). And “improvements,” that result in the “betterment” of the property apparently must be capitalized. Therefore, it would seem that fixing the defect (i.e., building code violation) of the stairs would require that this expense be capitalized and not merely deducted.
My 2 cents worth.
…so this was a “Betterment … fixing a pre-existing defect or condition, … increasing the … quality of your property.”…
…it seems that correcting the stairs to reflect current building code requirements would be considered a “betterment” of the property (i.e., fixing a pre-existing defect or condition). And “improvements,” that result in the “betterment” of the property apparently must be capitalized…
Yeah, after reading over Pub 527 for the um-teenth time, I sadly will have to agree. Thanks for the input.
It is my understanding the real estate and property tax square footage would not have changed.
Are the steps inside or outside?
If they’re inside, probably square footage is the same.
If the steps are outside, and some parts that had been inside are now outside, I think the square footage has been reduced.
it seems that correcting the stairs to reflect current building code requirements would be considered a “betterment” of the property (i.e., fixing a pre-existing defect or condition). -MakingTrax
I don’t think we have enough information to determine if that is the case.
Why were the stairs rebuilt?
What resulted in them being rebuilt?
Were they damaged in some way and that resulted in them being rebuilt, and since they were being rebuilt had to be done to the current code?
Did the requirement that they be rebuilt come about because of a Section-8 inspection that resulted in them needing to be rebuilt?
If the starting reason for why they were rebuilt is to fix damage to them, (ex. fix termite damage) then I think you could argue it was a repair - or that at least part of the cost was a repair.
But if the only reasons were to improve the property (like it was necessary so it could be rented) then I don’t see a good argument for it being a repair.
In the end it may not make that much difference - it still winds up coming off as an expense, just spread over multiple years instead of front loaded into the first year (or two). If your son’s incremental tax rate goes up in the future, he might be better off since effectively some of that income was shifted to being taxed now rather than in X years.
Are the steps inside or outside?
They are inside.
If they’re inside, probably square footage is the same…
Yeah, I guess I should have said main level living space is reduced as more main level sq footage is required for the new stairways.
Why were the stairs rebuilt?
Because my step-son was concerned with a tenant falling down stairs that were not up to code and him then possibly facing a lawsuit. They were not damaged, just built too steep to conform with current building codes.
That’s why I would tend to agree with the previous opinions that this would fall under the IRS interpretation of a betterment.
Thanks again to everyone for all the input.