Is new roof tax deductible?

Question from Tim updated on 13th June 2013:

We have owned one of our rental properties for nine years and have repaired the roof a few times on the cheap but now it is time for a new roof due to rust issues and leaks. We have no intention of selling and will not be changing the form or function of the building. We will also upgrade the insulation at the same time as the old insulation has become damp and ineffective in places. As the roof and insulation are an integral part of the building, can I claim both costs as repairs and maintenance? I would prefer not to be faced with this expense but for the benefit of the tenants comfort, this is required.

Our expert Mark Withers responded:

When determining whether expenditure on a building can be deducted as a repair or if it must be capitalised as an improvement, IRD expect you to first "identify the asset". In the case of a roof the asset is clearly the building itself because the roof has no stand alonde context or function without being attached to the building. Next, you are expected to ascertain whether the expenditure goes beyond what could be considered remediation of fair wear and tear i.e. Is it so extensive as to substantially rebuild the asset? Lastly, determine whether the work could be considered delapidation repairs i.e. was the roof already shot on acquisition? Given you have owned it nine years and given you are not creating a new asset and given the work is necessary to maintain the income stream for the property, I feel the expenditure would be fairly deductible as repairs to the building. If the same work was being undertaken on a new acquisition IRD would generally expect the cost to be capitalised as they would assume the need to replace the roof would have been a material factor in your assessment of the price you would have been willing to pay for the building i.e. every case needs to be examined in its own context and on its own merits.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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