What’s the Difference? Capital Improvements vs Repairs
When thinking about capital improvements vs repairs you need to have a clear understanding of the definitions of each.
A capital improvement is a durable lasting upgrade, adaptation, or enhancement of the property which significantly increases the value of the property. Often this involves structural work or restoration.
A repair on the other hand includes both routine and preventative maintenance, ie. work carried out when an asset “breaks” or before, so long as the work is carried out to restore the asset to the original condition. This includes action taken to prevent further deterioration and to replace or substitute a component at the end of its “useful life”. A maintenance task cannot be deemed a repair if it improves upon that original condition.
The reason knowing what a capital improvement is vs a repair is that the expenses need to be treated differently. The cost of capital improvements cannot be deducted at the end of the tax year like regular repair expenses. Instead, the cost needs to be added to the cost basis of the property and depreciated. The benefit of this is that it can reduce the tax hit associated with capital gains and depreciation recapture when the property is sold.
A capital improvement would include major work such as refurbishing the kitchen converting a room or attaching a conservatory. A repair on the other hand is general maintenance, for example, repairing a tap, repainting surfaces, fixing the air conditioning, or maintenance on appliances. The cost of repairs and maintenance can be deducted at the end of the tax year.
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