One of the BIGGEST Tax questions for owners of real estate is….What is the difference between repairs and maintenance vs. a capital improvement?
In answering this questions there are two questions that need to be asked.
1. The owner of the property needs to ask whether or not the expenditure materially add to the property’s value.
2. The owner need also to determine if the expenditure prolongs the property’s useful life.
If you can answer yes to either question, generally the cost will fall in the category of a capital expenditure. An important note is that a capital expenditure is not entirely deducted in the current year the expense occured but instead must be recovered through an annual expense ( call depreciation deductions) that is taken over the useful life of the depreciable property. In contrast a repair or maintenance expense is generally deductible in the year paid or incurred.
