Replaced roof on rental. Reducing basis by undepreciated old roof basis remaining using an authoritative article (using the PPI). How do I reduce the original basis?

[JohnTheCPA]

I am using the Producer Price Index to a pro rata allocation on the unadjusted depreciable basis for the asset based on the replacement cost of the disposed portion of the asset and the replacement asset.

[abctax55]

When was the rental placed in service?  Was a Cost Seg. study done?

[JohnTheCPA]

Placed in service 8/17/15.  House basis, net land 50,215; Land 16,534.  Using supporting article by Withum (article cites IRS approval & example is replacing a roof) & Fed website for Producer Price Index to address valuations. https://www.withum.com/resources/the-basics-of-partial-asset-dispositions/

https://data.bls.gov/timeseries/PCU23816X23816X

Here is the crux.  How do I make Asset Entry worksheet "accept/acknowledge" decrease in basis for old roof portion torn off? I was able to do a Casualty Loss for $6057 cost attributable to old roof (e.g. FMV before event) less FMV after event $1427 which squeezed my calculated loss figure of $4630 on F4797, line 14 as a loss from F4684.  However this is an ordinary loss and the roof is a capital asset (right?)

For the new replacement roof (2024), I imagine I have to begin its 27-1/2 yr depr in '24 and not try to "add it to the original basis" when it was placed in svc in 2015

[JohnTheCPA]

Placed in service 8/17/15.  House basis, net land 50,215; Land 16,534.  Using supporting article by Withum (article cites IRS approval & example is replacing a roof) & Fed website for Producer Price Index to address valuations. https://www.withum.com/resources/the-basics-of-partial-asset-dispositions/ and https://data.bls.gov/timeseries/PCU23816X23816X

Here is the crux.  How do I make Asset Entry worksheet "accept/acknowledge" decrease in basis for old roof portion torn off? I was able to do a Casualty Loss for $6057 cost attributable to old roof (e.g. FMV before event) less FMV after event $1427 which squeezed my calculated loss figure of $4630 on F4797, line 14 as a loss from F4684.  However this is an ordinary loss and the roof is a capital asset (right?)

For the new replacement roof (2024), I imagine I have to begin its 27-1/2 yr depr in '24 and not try to "add it to the original basis" when it was placed in svc in 2015

[Terry53029]

IRS allows you to expense the remaining deprecation on the old roof. You do not have to reduce basis of new roof. What authoritative article said you have to reduce basis on new roof 

[JohnTheCPA]

Agreed: we do not reduce basis of new roof, its completely depreciable.  Maybe I misspoke? (A) I need to reduce the basis of the original house by the calculated $4630 loss on its tear off.  Thus I need to reduce basis in Asset Entry & continue (?) over its original life beg. In ’13 (at this time Asset Entry doesn’t seem to allow partial write-downs on original basis.  Producer Price Index (PPI) calculations provide loss figure for old roof portion of original house.    Replace my 1st sentence with "Placed in svc 3/9/13, Bldg cost (net land) $59K, Historic Cost of roof $6057 (incl in $59K basis- per PPI calcs). [Rptd wrong basis house/land bc I have 3 rentals}

(B) The roof write-off from F4864, Casualty & Theft loss provides an ordinary write off $4630 on F4797, line 14 as an ordinary gain.  IMO the roof loss (of undepreciated basis) is a capital loss since the house is a capital asset.

[JohnTheCPA]

(B) should read "ordinary LOSS" (not gain) typo. 

[Terry53029]

You don't actually reduce basis of original rental. What you do is fill out the section in the asset worksheet of the original rental "MACRS property involved in like kind exchange of involuntary conversion", and that will reduce the remaining deprecation on the rental.

[TaxGuyBill]

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@JohnTheCPA wrote:

How do I make Asset Entry worksheet "accept/acknowledge" decrease in basis for old roof portion torn off?

For the new replacement roof (2024), I imagine I have to begin its 27-1/2 yr depr in '24 and not try to "add it to the original basis" when it was placed in svc in 2015

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You delete the old Asset Entry Worksheet and create two new ones. 

For example, let's say the original Basis is $200,000 and it has $20,000 of prior depreciation.   Then you determine that the roof original cost/value was $20,000.  You would then create two new assets: (1) The house with an original Basis of $180,000 and $18,000 of prior depreciation and (2) a Roof with an original Basis of $20,000 and prior depreciation of $2000.  Then delete the old asset.

Then 'sell' or whatever you need to do for the old roof.

If it is a depreciable asset, yes, start a new asset using the current year as the Place In Service date.

With that being said, since the Capitalization Regs came out, in my opinion,it is a good case that merely re-shingling a residential home is often actually a "repair" (merely re-shingling is not a "roof", which includes the joists, decking, etc.).

[Terry53029]

I preferer to not delete the old worksheet, but to fill out the section on involuntary conversion. that way I always have the original and how much deprecation Was taken off the original. I would then make a new worksheet for the new roof. On the books I would reduce the basis.   

[JohnTheCPA]

Friend, this is the source: https://www.thetaxadviser.com/issues/2016/oct/application-of-partial-asset-dispositions-and-de-minim... and the link to another article in a prior dialogue box (it was news to me too) https://www.withum.com/resources/the-basics-of-partial-asset-dispositions/

Hope this aids you (its a bugger bear to implement, lol).  But I get a $8K write off from two roof replacements and a sewer replacement.