For some residential investors, capital expenditure terminology — CapEx for short — is unfamiliar. Capital expenditure reserves are common in the commercial real estate sector but lesser known in the residential real estate space.
CAPITAL EXPENDITURES
A capital expenditure is something you can capitalize over a certain time period. It adds to or upgrades a property’s physical assets. It is typically a one-time major expense.
Examples of capital expenditures include a new roof, appliance or flooring. A capital expenditure could also include installing a new heating and air conditioning system or doing a major overhaul of an existing HVAC system. The same goes for extensive new plumbing or major electrical work.
If you are painting multiple properties, that could be classified as a capital expenditure, but routine painting upon move-out is just that, routine. You won’t be able to tap your capital expenditure reserve to pay for run-of-the mill maintenance.
MAINTENANCE AND REPAIRS
Repairs such as move-out painting, touch-up painting, or patching a wall or floor fall into the routine category. The cost of routine maintenance is typically covered by an investor’s annual operating budget, not from the capital expenditure reserve.
The easiest way to identify routine maintenance is to ask yourself if the repair is something that tends to be reoccurring. Examples include repair of existing appliances, cleaning the carpets or patching a worn section of flooring.
Some repairs could be conceivably paid for from either the capital expenditure fund or the operating fund. Look at whether the expense is “major” to determine whether it qualifies to be paid for from capital expenditure reserves.
For example, if you need to replace multiple sinks or toilets, that would come from the CapEx reserves, but if you only need to replace one sink or one toilet, that would come out of your annual operating budget. If you need to replace one light fixture, expect to pay for that from your operating budget. If you need to replace multiple light fixtures, the expense could come from the CapEx fund.
The following table summarizes many of the factual considerations used by the IRS. These factors, although not exhaustive, should be considered in your analysis to distinguish between capital expenditures and deductible repairs:
| Capital | Repair |
|---|
| Improvements that “put” property in a better operating condition | Improvements that “keep” property in efficient operating condition |
| Restores the property to a “like new” condition | Restores the property to its previous condition |
| Addition of new or replacement components or material sub-components to property | Protects the underlying property through routine maintenance |
| Addition of upgrades or modifications to property | Incidental repair to property |
| Enhances the value of the property in the nature of a betterment | |
| Extends the useful life of the property | |
| Improves the efficiency of the property | |
| Improves the quality of the property | |
| Increases the strength of the property | |
| Increases the capacity of the property | |
| Ameliorates a material condition or defect | |
| Adapts the property to a new use | |
Hopefully these examples give investors a clear idea of the difference between capital expenditures and routine maintenance.
FAQs
In a nutshell, here are the differences between R&M & CapEx: Repairs & Maintenance costs are for routine maintenance to keep your assets running in their current state. These can be factored into Profit & Loss for the year. Capital Expenditure costs are funds spent to improve assets beyond their original benefit.
What is the difference between capital expenditures and repairs? ›
Maintenance costs are expenses for routine actions that keep your building's assets in their original condition; these typically fall under Repairs and Maintenance (“R&M”) in your operating budget. On the other hand, capital expenditures/improvements are investments you make to increase the value of your asset.
Are routine repairs capitalized? ›
The general rule is that expenses for repairs and maintenance must be capitalized and depreciated, but there are three exceptions that the IRS refers to as "safe harbors." This basically means that you don't necessarily have to meet all the rules if extenuating circ*mstances exist.
Is repairs of fixed asset a capital expenditure? ›
This arises because whilst a repair to an asset is an allowable item of expenditure for tax purposes, if the asset is altered, improved or replaced the expenditure is capital expenditure and is not allowable. Capital allowances may or may not be allowable on this capital expenditure.
Should repairs be capitalized or expensed? ›
Taxpayers generally must capitalize amounts paid to improve a unit of property.
What are the three types of capital expenditures? ›
Types of Capital Expenditure
- Expenses incurred to reduce costs.
- Expenses incurred to increase earnings.
- Expenses incurred on non-economic grounds.
If an asset is in a state of disrepair and is brought back to life for its intended use, the costs will generally be capitalized and depreciated.
What is routine repairs? ›
Routine Repairs means the process of restoring, to a serviceable condition, by putting back together real property which is damaged.
What type of expenditure is repairs? ›
Both repairs and maintenance are considered operating expenses as their incurrence does not extend the life of the underlying asset.
How do you distinguish between a repair and a capitalizable asset? ›
Codes for Repair Costs:
Maintenance and other costs to maintain an asset in its normal state are considered repairs. Costs to replace an existing asset or asset portion with an improved or superior asset, usually at a cost materially in excess of the replace item, are considered capitalizable improvements.
The IRS has strict guidelines for how CAPEX should be treated. For example, repairs are considered current expenses, but improvements are capital expenses.
What is the difference between repairs and maintenance and capital expenditure GAAP? ›
Capital expenditures are costs that a company incurs to purchase an asset, extend its life, or increase its capacity or efficiency. Repairs and maintenance expenses only maintain an asset's life or current condition.
Is repair of machine for keep it in working condition a capital expenditure? ›
The repairs are necessary to keep the machine in working condition, and the expense incurred is expected to provide benefits only in the current accounting period. Therefore, it is classified as a revenue expenditure. Conclusion: The correct answer is option 'B,' i.e., Revenue expenditure.
Can repairs be capitalized accounting? ›
When to Capitalized Repair and Maintenance Costs. When these costs either extend the useful life of an existing asset or increase its productive capacity, then they are considered to be capital expenditures instead.
Which one is not considered as capital expenditure? ›
If an item has a useful life of less than one year, it must be expensed on the income statement rather than capitalized, which means it isn't considered CapEx. Unlike CapEx, operating expenses (OpEx) are shorter-term expenses used for the day-to-day operations of a business.
Is painting a repair or improvement? ›
Painting a rental property is generally considered a repair expense much like replacing a damaged door, leaky faucet, or broken window. However, if new paint is part of large-scale improvements to the residence, it likely will qualify as a capital expense.
Why are ordinary repairs expensed? ›
Ordinary repairs are revenue expenditures because these would increase only the asset's efficiency, not its useful life or value. These costs are recurring, so these should be recorded as expenses.
Is replacing flooring a repair or improvement? ›
A repair keeps your rental property in good operating condition but does not materially add to its value, substantially prolong its useful life, or make it more useful. It's well settled that replacing an entire carpet in a rental property is an improvement, not a repair.
What are the 3 types of repair? ›
The Three Types of Maintenance
- Corrective Maintenance.
- Preventative Maintenance.
- Predictive Maintenance.
However, the difference between repair and maintenance work is that repairs aim to restore functionality while maintenance looks to preserve functionality. Put simply, repairs are done after downtime to minimize losses, while maintenance is done to prevent unexpected asset downtime.
In a nutshell: performing regular auto maintenance helps keep your ride running smoothly and can prevent costly repairs down the road. Maintenance is regular service that will help prolong the life of your vehicle, while auto repair is when a part or fluid is not performing and needs to be fixed.
Do you capitalize maintenance CapEx? ›
CapEx does not go through a company's Profit & Loss statement. Rather, the expenditure goes through the cash flow statement and is capitalized as an asset on the balance, with wear and tear periodically recognized as depreciation expense in Profit & Loss.
Is building repair CapEx or OpEx? ›
For tax filing purposes, repairs and maintenance fall into the operational expense (OpEx) bucket, while improvements are classified as capital expenditures (CapEx).
What is the difference between a deductible repair expense and a capital improvement of rental property? ›
The full cost of a repair can be deducted in the year you make it. A capital improvement involves extensive work at a more significant cost that adds to an asset's useful purpose or extends its useful life. The cost of an improvement is divided up over the number of years you expect the asset to remain useful.
Are ordinary repairs and maintenance are capitalized and added to the cost of the asset? ›
Ordinary repairs are expensed immediately rather than being capitalized.
Are repairs and maintenance considered operating expenses? ›
Frequently referred to as OPEX, operating expenses are all of the costs that go into running a building. These include utilities, repairs and maintenance, exterior work, insurance, management, and property tax.
Is maintenance of equipment capital expenditure? ›
General repairs and maintenance of existing fixed assets such as buildings and equipment are also considered operating expenses unless the improvements increase the lifespan of the asset.
Is repairs to office equipment a product or period cost? ›
Repairs to office equipment are period costs. That is, the cost of the repairs to office equipment will be reported as a selling, general and administrative (SG&A) expense in the period in which the repairs take place. Repairs to factory equipment are not period costs.
What are examples of capital expenditures? ›
Examples of Capital Expenditure
- Land.
- Building.
- Office Furniture.
- Computers.
- Office Equipment.
- Machinery.
- Vehicles.
- Patents.
According to the Internal Revenue Service, painting may qualify as a capital improvement if it's part of large-scale improvements to a rental property. Painting by itself, however, is generally not considered a capital improvement.
For some residential investors, capital expenditure terminology — CapEx for short — is unfamiliar. Capital expenditure reserves are common in the commercial real estate sector but lesser known in the residential real estate space.