Question

1. On January 1, 2017, Barry Barker owned rental property which had an adjusted basis to him of $350,000. Daniel made the following expenditures during 2017:

Ordinary painting of building	$ 6,000
Repair of roof section (useful life not appreciably extended)	1,500
Legal fees paid to defend title	3,000
Property taxes	7,000
Assessment for local street improvement (value of property increased greatly)	5,000

In 2017, which of these expenditures does Barry capitalize and which does he expense?  What is his adjusted basis in the building at year end?  (Ignore depreciation.)

Answer 1

Note-Capital Improvement is an addition of a permanenet structural change or the restoration of the property that-

• Enhance the property's overall value or
• Increase its useful life or
• Adapts it to new uses.

All the capital improvements will be added to the adjusted basis of the property.

General repair expenss like, general paiting and repair of roof is not to be added to the adjusted basis. Rather they are to be expenses .

Amount paid to obtain the title of the property like Legal fees paid to defend title is to be added to the adjusted basis of the property.

General tax payment like, property taxex are to be expensed.

			Reason
Ordinary painting of building	6,000	Expenses	Ordinary repairs
Repair of roof section (useful life not appreciably extended)	1,500	Expenses	Ordinary repairs
Legal fees paid to defend title	3,000	Capitalize	Amount paid to obtain the title of the property
Property taxes	7,000	Expenses	General taxes
Assessment for local street improvement (value of property increased greatly)	5,000	Capitalize	Add value to the property.

adjusted basis in the building at year end =$350,000+$3000+$5000 = $358000