If you’ve ever filed a claim form with an insurance company after a storm for roof damage on your property, you might have been surprised that the money you received didn’t cover the replacement cost and improvements. The reason was that your roof depreciated in value. Property owners should consider this when filing insurance claims.
What Is Depreciation?
It may surprise you to learn that your roof is a separate asset from your house and property. While a residential rental property may go up in valuation, its roof will depreciate over time.
Since the lifespan of a roof is about 27.5 years, on average, roofs will fall in value with age. Depreciation costs are the amount that your roof depreciates from when it was a new roof until you make a damage claim during the recovery period. This is the actual cash value of your roof.
Roofs, in this example, depreciate at a rate of 5 percent each year from installation. The value won’t change much in the first year of age. By the second year after installation, though, the roof will begin to show more depreciation than in later years as the roof will begin to show more wear and tear.
Maintenance and obsolescence will also factor into depreciation. A well-maintained roof will depreciate less than the one you ignore until damage occurs. Obsolescence refers to roofing materials that are out of date or no longer sold.
Roof Age and Insurance
Because your roof was worth more when it was new than 20 years later after damage, wear, and tear, your insurance company will use the depreciation rate to determine its actual cash value and how much it will pay you to complete the claim process. Your home or business insurer will look at how much the roof cost originally, its decrease in worth, and the cost to replace it today.
Actual Cash Value
The actual cash value, or ACV, of a roof refers to what the roof expense when it was new. It is the starting point for a roof’s valuation.
The national average cost for roof replacement is about $8,000, but roof damage repair in most cases is several thousand dollars, even if it doesn’t call for replacing the entire roof. The replacement cost value, or RCV, refers to roof replacement expenses.
This term refers to the difference between your roof’s cost when new and its replacement cost. An insurance company will use recoverable depreciation to distribute the insurance payments in increments. Usually, the first payment is toward the roof’s cash value that will be used to repair or replace the roof. Any second payment would be toward recoverable depreciation costs.
Non-recoverable depreciation is the depreciation from the ACV of a roof that is not eligible for reimbursement under your insurance policy after roof repairs or replacement. Some insurance companies do offer roof replacement cost coverage minus a deductible expense.
Recent legislation is making it easier for a business to replace the roofing for commercial buildings. The Tax Cuts and Jobs Act of 2017 allows bonus depreciation of 100 percent for a new roof if installed before 2023, 80 percent for 2023, and 60 percent for 2024. This legislation makes repairs or commercial improvements to a building, such as a new and affordable roof.
Contact a roofing contractor to find out if your roof repairs are covered by this legislation or if your business will qualify for this deduction. The contractor can meet for a consultation at the building that needs repairs. Request a meeting to learn more about the expenses involved and whether receipts will be needed for an insurance claim, for example.
Why a Roof Depreciates
Roofs will not keep the same valuation because of the wear they face and the fact that roofs are replaced about every 30 years. It’s one of the expenses of owning property. Building owners adding a new roof could list it as a capital improvement to their rental property.
The best way to get a fair valuation is to document the condition of your roof at your home or business each year and date them. Save receipts from new roof installation and maintenance.
The depreciation calculation is done when an insurance claim is made for damage. In most cases, an insurance company starts with the ACV and calculates depreciation, subtracting it from the ACV.
If you have ACV home insurance coverage, you won’t be penalized for the depreciation, but because the roof is older, replacement costs will be higher. You will pay your deductible and the difference between the insurance payment and the cost to replace the roof.
If you have a home insurance policy that covers the replacement cost of your roof, you will pay the deductible amount, but the insurance company will cover the remaining balance. This policy comes at a higher expense.
If you are trying to decide whether to pay for replacement cost value coverage, contact an insurance agent or a roofing service to get a better understanding of whether RCV coverage is worth the expense.
Also, consider the age of your roof. Using the straight-line method of depreciation, a $20,000 roof that is a year old will still be worth about $20,000, for example, but a $20,000 roof that is 20 years old may be worth less than $5,000.
Contact the Experts
If you find the claims process to be confusing, contact a roofing services company. Request a consultation about the repairs needed. In most instances, they will help you navigate the claim process to replace your roofing as an improvement or repair your property as a business tax deduction.
Don’t wonder if property improvements and costs incurred are covered by your policy, what your deductible is, or whether your bills will be covered and paid. Talk with a roofing contractor as well as an insurance agent today.