Repairs and Maintenance

[AminMurji]

Can the following items be expensed or capitalized?



1. Furnace replacement

2. Hot Water Tank replacement

3. Roof replacement

 

[moparcanuck]

As with all such questions, the only true simple answer is 'it depends'.



Firstly, if you've owned the property for a while and are just repairing out of normal wear and tear, you can likely expense it. If you've just purchased a fixer-upper and need to do these items to get it ready, it's capital.



If you're replacing with the same style (or at least as close as you can with new requirements these days), it's likely a repair. If you're upgrading to a newer fancier style (ie, taking old flat tar and gravel roof and putting on a peaked roof) it could be capital.



Those are only a few considerations, but the most common.

 

[Sherilynn]

Agreed, but the upgrades need not be that noticeable for them to be considered capital; for instance, going from ashphalt shingles to metal roofing.

 

[Thomas Beyer]

Usually you would all capitalize them, as per CRA rules, then amortize them, say a roof over 25 years, a hot water tank or furnace over 10.



http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/crcp-eng.html

 

[moparcanuck]

Actually, if you do eventually decide to capitalize them (see my first post), there is no specific period to amortize them over. Capital Cost Allowance (the CRA official name for 'amortization') does not depreciate over a specific amount of time, but rather just takes a specified percentage into expense on a declining balance method. The result is that while the asset may be reduced in value over time, it never actually hits zero, nor does it ever stop being amortized. For most of the repair examples mentioned, there is little question that the item becomes part of the house, thus is in most cases put into Class 1, which is subject to 4% Capital Cost Allowance.



There is some school of thought and discussion on other items which could easily be sold seperately, such a movable appliances, become just part of the property of their own asset class. While a washer/dryer COULD easily be taken out of a house and sold seperately, it is unusual to do so. A new roof/furnace/whatever is pretty much never sold seperately from the house.

 

[AminMurji]

If you claim the CCA, is it recaptured when you sell the house assuming there is a profit?

 

[Sherilynn]

Yes.

 

[Sherilynn]

I would rather not claim depreciation and instead use the full building cost to offset capital gains later. The only items I currently claim are appliances being replaced (of course an item of equal or greater value is then being added to the building cost).



However, if someone makes a sizeable income today and anticipates a substantial pay cut (retirement, for instance) when they sell the property, it may make more sense to claim the depreciation now and suffer the recapture later.

 

[Thomas Beyer]

[quote user=AminMurji]If you claim the CCA, is it recaptured when you sell the house assuming there is a profit?


yes, but what is better: paying taxes today or tomorrow ?



Usually you capture as much as is needed to get taxable income to 0, up to 4% of the capital cost annually (using a 25 year amortization)

 

[ChrisDavies]

Thomas brings up a good point too about when you go to sell. Owners want statements that show no taxable income, sellers want as large a net income as possible. It's a good idea to look at your statements when you're deciding to sell and see if there's expense items which could be capitalized and moved onto a separate schedule.

 

[moparcanuck]

[quote user=AminMurji]If you claim the CCA, is it recaptured when you sell the house assuming there is a profit?





Yes it is. And this gets into another often debated question of whether to take the CCA or not. If you are already in the top tax bracket, you might as well take it, as it's better to pay tax later rather than now. However, the risk runs that if you're a more moderate income earner, say in the 22% tax bracket, you can claim the CCA and save 22% tax for years. Then, when you sell, between the capital gain and the recapture, you might get pushed up to the top tax bracket of 29%. Depending on how long you've held the property, this might still be worth it, but it's definately something to consider.



Additionally, in the early years where your mortgage is higher, you are not likely to need CCA as an expense as much since mortgage interest will chew up a lot of the revenues. If you're a long term holder, as the mortgage gets paid off and your remaining balance in your CCA pool shrinks, your maximum claim for CCA each year will shrink as well if you've taken it in the past. Remember, there is no set time frame for CCA to be taken on with any asset. It's a declining balance, so each year if you take the CCA, the max next year available gets smaller (although at 4%, it definately takes a while to show much of a shrinkage)



And again, it's worth repeating that you have to remember that you can not create or enhance a loss with CCA. The most CCA you can claim is the amount needed to bring your rental income to zero. If you're already in a loss, you can not claim any CCA.

 

[mmeetkaur3]

Thanks for it...............

 

[Anonymous]

Hi thomas, I become your fan. You read your number of post and found you perfect in all the answers. Its my pleasure to read your threads. Thanks for all the information.