Repair or addition to rental property -

QUESTION: I recently purchased a rental property and am very green to the game (as you will see).  This year, the house developed a leak in multiple I changed the roof (at a cost of $6500).  In speaking with my accountant, he advised me that I could not claim this as a repair deduction since in fact I did not effect a repair but rather I added a new roof! Surprised, I asked him whether or not I could claim say 20-30% of this amount per annum over the next couple of years.  He replied in the negative.  Is there anything I can do to use the $6500 in whole or in part to offset the rental income?  Thanks for your thoughts.

david ingram replies:

I can not tell if this is a Canadian or American question.  However, in general for both countries:

1.    If you had a building inspection when you bought the property (if you did not, you should not have bought the property) and the inspection said you needed a new roof, the repair /replacement is NOT a deduction in the current year.  It's cost would be added to the building value under Class ONE of your CCA schedule or put on 4562 of a US return.

2.   The same situation would exist if the disclosure statement with the sale said clearly that the roof needed replacing.

On the other hand,

3.   If you had an inspection and it said the roof was fine and you had no idea the roof needed replacing, then the replacement / repair is a deduction against current income on Canadian form T776 or US form Schedule E.

And another possibility is a sort of combination.

If you needed a repair you did not expect as in 3 above and because of the expense quoted, decided to spend a little more and add a dormer or raise the roof or replace relatively inexpensive duroid shingles with a raised lifetime warranted metal roof, then you should be able to deduct the amount the duroid roof would have cost and capitalize the difference.

This older question will give you more answers from the Canadian side.

My question is: Canadian-specific

QUESTION: We have bought a duplex, which were occupied by tenants, last year in BC. During the house inspection before the purchase, We found the basement bathroom had major problem and decided to repair after we bought the property. Half month after we bought the property, the basement tenant moved out and we began repairing the bathroom. Because the place was vacant, we decided to also paint the interior walls, and replaced the carpet that was stained by cats. My questions are which parts of these repairs are capital expenses, which parts are maintenance expenses?

david ingram replies:
As described, the repairs are improvements and not deductible immediately.  They may be added to the cost of the building and depreciated over the years.

In general, 'anything' you intend to do or know you are going to do to a rental property is a capital expense.  Therefore, if you buy a place knowing it has a bad roof and you have to replace it right away, replacing the roof must be added to the purchase price.

On the other hand if you bought a place with a brand new roof with warranty and a year later, had to replace it because it was leaking like a sieve and the installer had gone broke, the replacement would be a repair.

If you had the building for ten years and the roof went and you decided to raise it 2 feet so that you could put a coupe of rooms in the attic, that would be an improvement in general although you could likely claim the amount that the roof repair would have cost as a repair and capitalize the rest.

Likewise with kitchens.  If you need to replace the counter tops ($1,200) and end up replacing all the cabinets, tiling the floor and putting in new appliances for  $28,000, that is an improvement although, again, you could likely expense the $1,200.

goto, click on Tax Guide in the top left hand corner and read the Rental section for more examples of what the courts have said.



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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.


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