Is a New Roof a Repair or Improvement?

Determining whether a new roof is a repair or an improvement is a common question for property owners. The answer has financial weight, directly influencing your taxes. How you classify the expense determines if you can deduct the cost immediately or if you must account for it over the long term. This distinction is important for managing your property’s finances and tax obligations.

Defining Repairs vs Improvements for Tax Purposes

Costs classified as repairs are current expenses, meaning you can deduct the full amount from your income in the tax year the cost was incurred. This provides an immediate tax benefit by lowering your taxable income for that year. For example, patching a small leak is a current expense that keeps the property in its normal operating condition.

In contrast, an improvement is treated as a capital expenditure. Instead of being deducted immediately, the cost is capitalized, which means it is added to the property’s “cost basis.” The cost basis is the original purchase price of the property plus certain settlement fees. Adding the cost of an improvement, like a full roof replacement, increases this basis.

A higher basis is beneficial when you sell the property. Your taxable capital gain is calculated by subtracting the adjusted basis from the sales price. Therefore, a higher basis reduces your total gain, which in turn lowers the amount of capital gains tax you owe. For owners of rental properties, the cost of an improvement is recovered over time through depreciation, deducted over the property’s useful life, which for residential rental buildings is 27.5 years.

The IRS Standard for Classification

The Internal Revenue Service provides a structured framework to help taxpayers differentiate between a repair and an improvement. This analysis begins with identifying the “unit of property” (UoP). For a homeowner, the entire building structure, including its various systems, is considered a single UoP. Any expense must be evaluated against three standards, known as the “BAR” test, to determine if it qualifies as an improvement.

The first standard is “Betterment.” An expense is a betterment if it fixes a pre-existing material defect, materially adds to the property, or results in a material increase in capacity, productivity, or quality. For instance, replacing standard-grade windows with high-efficiency thermal pane windows that significantly lower energy bills would be considered a betterment.

The second standard is “Adaptation.” This applies when an expense modifies a property for a use that is new or different from its original intended use. An example would be converting a former retail storefront into a residential apartment unit. The costs associated with this conversion adapt the property to a different purpose and must be capitalized as an improvement.

The final standard is “Restoration.” An expense is a restoration if it involves replacing a major component or a substantial structural part of the property. This includes work that returns a property to its ordinary operating condition after it has fallen into disrepair. Replacing the entire plumbing system in a building would be a restoration because it replaces a primary system of the building UoP.

Classifying Your Roofing Project

Applying the IRS framework to a roofing project helps clarify its classification. Minor work that keeps the roof in its existing condition is a repair. For example, if a storm damages a handful of shingles and you hire a contractor to replace only those specific shingles, the work is a repair. This type of job is routine maintenance because it doesn’t enhance the roof beyond its original state.

A roofing project becomes an improvement when it meets one of the criteria of the BAR test. A complete roof replacement is the most common example of an improvement through restoration. Because the roof is a major structural component of the building, replacing it in its entirety is considered a restoration of the building unit of property. The cost must be capitalized.

Other roofing jobs can qualify as improvements under the other BAR test standards. If you replace standard asphalt shingles with a more durable and energy-efficient metal or slate roof, the project is a betterment because it increases the property’s quality and efficiency. If a project involves altering the roofline by adding dormers to convert an attic into a living space, it is an adaptation because it changes the property’s function.

Essential Documentation for Your Records

Maintaining thorough documentation is necessary to support your classification of a roofing project, as these records serve as evidence if the IRS questions the expense. You should keep:

• The contractor’s invoice with a detailed description of the work performed, itemizing labor and the specific materials used.
• Copies of the initial contract or project proposal, which outline the scope of the work before it began.
• Proof of payment, such as canceled checks, bank statements, or credit card statements, to verify the expenditure.
• “Before” and “after” photographs that show the condition of the roof and the completed work.
• Copies of any building permits required by your local municipality, as these indicate the scale of the construction.