Tax question regarding new roof on rental house

[Cobra9777]

In 2015, I replaced the roof on one of my rentals. There was no insurance claim, it was just very old and leaking. I capitalized the cost and began depreciation in mid 2015.

In 2016, we had a hail storm which damaged the roof. Insurance claim paid 100% of the cost to replace the roof (deductible was covered by contractor). This roof was quite a bit more expensive than the old one, but since there was no cost to me, I was not planning to capitalize anything in 2016 with regard to the new roof.

Question: Can I just keep depreciating the old roof and ignore the new roof and insurance proceeds? Or do I have to retire the old roof as a casualty loss (offset with insurance proceeds), and then capitalize the new roof after reducing it's basis by the amount of net insurance proceeds?

Based on a quick scan of Pub 457, I think the latter is the correct approach. But because the insurance proceeds and the cost of the new roof are the same, this would just transfer the adjusted basis of the old roof to a new asset record and restart depreciation. In effect, no difference vs continuing to depreciate the old roof, except I suppose the useful life is extended by one year.

Plus, I just spent two hours wrestling with TurboTax to try and get it to link up the casualty loss and insurance proceeds with the retirement and replacement of the rental asset... to no avail. So, I'd like to just go undo all that stuff and take the easier path if that's advisable.

Thoughts?

 

[Planning2]

Just keep depreciating the old roof.

If the insurance reimbursement did not exist, you would write off the old roof and start depreciating the new roof. Since there is no new cost to depreciate, essentially the new roof is a continuation of the old roof.

 

[GrayHare]

AFAIK a new roof paid by insurance is the same as a roof paid for by you. Insurance did not pay for a new roof but rather for the loss of the old. You spent the money on the new roof and can treat it for tax purposes in that fashion.

 

[Jerry1]

Based on a quick scan of Pub 457, I think the latter is the correct approach.

You are correct, that is the correct approach. However, let's look at this from a practical matter. Let's say you do get audited and choosing to go the easy route (depreciating the old roof) is found to be incorrect. What will the IRS do?

They will force you to do it correctly and since the dollar difference will be zero or at least immaterial, there will be no significant penalty. In fact, since the new roof was "quite a bit more" than the old one you're short changing yourself by taking the easier path.