Any improvement that you make to a rental property you own with an expected life of more than one year is a capital improvement, according to the Internal Revenue Service, or IRS. The cost of the improvement depreciates over its useful life instead of fully deducting it from the year you completed the improvement.
Every cent you put into your rental property -- the purchase price, maintenance, repairs, improvements and sales costs -- is deductible. That is, you can subtract the cost of every expense from the property's income. If there are more costs than income, under some circumstances you can then subtract any remaining costs from your regular income. There are two classes of deductions for rental property expenses: those expenses that are immediately deductible and those that are deductible over more than one year. The expenses that are deductible over more than one year are capital improvements, which are subject to depreciation. If you repair an existing roof, the cost is fully deductible in the year of the repair. If you are replacing the roof with a new one, it is a capital improvement, deductible over many years.
Depreciation is a method of deducting the cost of a business or investment asset or improvement over the course of its useful life. The tax rules for depreciation are complex. There are two depreciation systems -- the General Depreciation System, or GDS, and the Alternative Depreciation System, or ADS. Within these systems are two types of depreciation: straight line depreciation and accelerated depreciation. In the straight line method of the GDS, which is the simplest process to employ, you determine annual depreciation by dividing the asset's cost by the number of years in its useful life.
Depreciating a Roof
According to the IRS, a roof has the same useful life as a building. In the GDS, a building's life is a 27.5-year term; in the ADS, it is 40 years. In the straight line method, you would divide the roof's cost by either 27.5 years or 40 years, depending on which depreciation system you use. The resulting figure is the annual depreciation deduction you could take for the roof for each of the 27.5 or 40 years of its useful life. If you choose accelerated depreciation, you would take a greater depreciation deduction in the early years of ownership and less in the later years.
What if You Need a New Roof In 15 Years?
Assets don't always last as long as we'd like them to or as long as the IRS class ascribes to them. If you have to replace your roof before its IRS useful life term expires, you stop depreciating the current value and start a new round of depreciation for the new roof.
Home Capital Improvement
Capital improvements to homes are not deductible in any way, unless the capital improvement and the profit exceeds the $250,000/$500,000 tax exclusion. This virtually never happens to anyone with a home value under $750,000 to $1 million, and rarely occurs with homes valued under $1.5 million. Nonetheless, you can still add to the cost basis of your home when determining net profit at sale.