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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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A contractor ripped me off for some work done to improve

Customer Question

A contractor ripped me off for some work done to improve and repair a rental apartment. I had to hire another person to fix what he did and didn't do. Could deduct the money paid to the ripoff artist? I believe the money paid to the second fellow is deductible as a repair (for the repair items) and as a capital improvement (for those items) in the usual manner. How do I classify the money paid to the first guy and not yet recovered? There doesn't seem to be a line in the 1040 long form for "Ripoffs from sleazy contractors."
Submitted: 8 years ago.
Category: Tax
Expert:  Lev replied 8 years ago.

Generally any expenses in connection with rental property are deductible on the schedule E - - please be aware that this is 2007 form just for illustration - 2008 forms are not available yet.

Repair expenses are reported on the line 14 part I. Your expenses should be classified as what they are paid - repair, maintenance, supplies, etc - see type of expenses on lines 5-18

If some of these expenses are improvement expenses - they should be added to the basis of the property as a capital expenses and depreciated the save way as you depreciate the rental property (27.5 years).

Please see some examples in the IRS publication 523 - page 9 - which expenses may be considered as repairs and which should be classified as improvements and added to the basis of the property.

If you deduct the money that you consider as "ripoffs" and later recover all or some of these funds - recoveries will be taxable income in that year.

Customer: replied 8 years ago.
Reply to LEV's Post: I've been doing just this for a number of years with respect to repairs and capital improvements, (bought building in 1977, lived and rented an apartment; moved out of our apartment in 1980 and rented out all the apartments) and what you've said is quite correct.
Perhaps an example or two of what I need to know would help.
Schedule E Line 14 Repairs. On a supplementary sheet I list all repairs. One line says "Repair of bannister $250", OK? I deduct $250. Now where does the "Paid other contractor to repair bannister but he didn't $250" go? It's not a repair, eh? Wasn't done. But I'm out $250 yes? What do you call this and where does it go?
Now capital improvements:
"Bathroom renovation $3000.00". Now this gets amortized and put into basis as you said.
"Bathroom renovation I paid for but did not get done $3000.00" Where does this go? What do you call it? I paid the money but got no renovation. Can't put that into the basis, eh? Doesn't get amortized, does it? I paid the $3000.00 in one year, not over 27.5 years.
Perhaps these are just bad debts?
How are these things handled, what are they called, and where do they go?