Should You Capitalize a Roof Replacement?

The IRS's Tangible Property Regulations have made it difficult to decide whether to capitalize or repair roof repairs and replacements. Learn more about when you should capitalize and when you should repair.

Should You Capitalize a Roof Replacement?

The question of whether to capitalize roof repairs and replacements has been a long-standing conundrum for tax professionals and their clients. Generally, it is best to pay for such costs in the year they are incurred. But the analysis needed to decide what needs to be done is not always straightforward, especially with the recent release of the IRS's Tangible Property Regulations. Replacing an entire roof with a new one is considered an improvement, which must be capitalized and depreciated.

On the other hand, a repair is considered maintenance, such as fixing roof leaks or replacing shingles. Unfortunately, most insurance companies require you to pay a deductible every time the roof is repaired, usually every ten years. If you have had a roof leak, for example, it would be considered a repair since there has been damage to a part of the roof that needs to be fixed. However, if the average life of a roof is 25 years, it may be best to get a new roof in this case.

For financial statements, insurance income net of the book value of the roof would be considered a gain for finance and the cost of the roof would be a new asset that would depreciate.