Capital Improvements vs. Repairs and Maintenance Expenses
Understanding The Differences Between Capital Improvements vs. Repairs
Being a real estate investor involves regular attention to your properties. One location may need new flooring in the kitchen, while the other might have a stubborn leak in the bathroom.
It’s important to invest money into addressing these issues, especially when you know that you can deduct them at tax time. Of course, you can’t deduct these two projects in the same way, because one is a capital improvement and the other is a repair. The difference between capital improvements vs. repairs can be tricky to distinguish, but you’ll need to know it when you file your taxes.
What are Capital Improvements?
As a real estate investor, you will make a certain number of capital improvements to the property throughout your term of ownership. These improvements increase the property value, and they’re not usually something that you have to do on a regular basis. Common capital improvements might include:
- Upgrades to the flooring or countertops
- Room additions
- Room renovations, such as a basement remodel
- Occasional replacement of necessary features, such as the roof or driveway
It’s not always easy to tell whether a project is a capital improvement. As a rule, if it increases the home value or extends the lifespan of the structure, it’s probably a capital improvement.
What Distinguishes Capital Improvements From Repairs
Repairs and maintenance are the kinds of tasks that you have to do regularly to preserve the property’s condition. They may not increase the value as much as maintain it. You might have dozens of maintenance tasks for a property each month, and a handful of repair bills each year. Common projects in this category are:
- Pool cleaning
- Resealing a roof
- Patching cracks in a driveway
- Repairing an appliance
- HVAC maintenance
Most of the time, you won’t spend as much money on repairs as you pay for capital improvements.
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What Are the Tax Implications
Tax time is when you need to understand the difference between capital improvements and repairs. Generally, you can deduct the expenses you pay for repairs and maintenance in full for the year that you do the work.
Capital improvements must be capitalized and depreciated over time. The way that you depreciate it depends on the item and its natural lifespan. For example, if you replace a roof with a 10-year lifespan, you divide the cost and claim one-tenth of it for each year.
How Do Investors Make a Choice
Although most repairs, replacements and upgrades fit into one of these two categories, it’s not always clear which one is the correct choice. It’s wise to consult your accountant before making an investment. Your ability to claim capital improvements may depend on the type of property or your status as owner. In some cases, you can’t claim improvements as a deduction. In those instances, you might have to use the improvements to adjust the cost basis of the property, which could lower your capital gains taxes when you are ready to sell.
Understanding the way that your regular expenses and property improvements affect your taxes can help you minimize your tax liability. At Renovo Financial, we offer convenient loan programs tailored to investors. Contact us for more information or to apply.
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