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You may often find yourself asking the question "How do I distinguish a capital improvement from a repair expense"?
Maintaining your property is not a one-size-fits-all proposition. The common areas require a broad range of routine maintenance and repairs to keep them looking good and operating smoothly. Maintenance activities can include simple light bulb replacements, housekeeping and paint touch-ups in hallways and garages, landscaping, irrigation repairs, and other related tasks that are performed on a frequent or ongoing basis.
And then there are major repairs, replacements and upgrades, which require larger – and not always planned-for – outlays of time, effort and expense. Better known as capital expenditures or improvements, these can include big-deal undertakings like carpet replacement, major lighting or landscape projects, deck replacement/refurbishment, security system upgrades or replacements, exterior painting, painting of garages, stairways or hallways, and many more.
With such a wide range of maintenance and repair activities and expenses to consider, one thing’s for sure – all of these cash outlays can’t come out of the same part of your budget. That’s why budgets include allocations for both “maintenance” costs and “capital expenditures/Improvements.” What’s the difference? In this FAQ, we’ll examine some important facts and considerations about each one.
1. First, know the difference.
1. First, know the difference.
Maintenance costs are expenses for routine actions that keep your property in original condition; these typically fall under Maintenance. On the other hand, capital improvements are investments you make to increase the value of your property. Though simple, this distinction is important -- maintenance is an expense, while capital improvements enhance the property's market value.
2. Maintenance work has a pretty specific definition.
2. Maintenance work has a pretty specific definition.
Generally speaking, both routine and preventative maintenance are classified as such if they are performed to restore the property's physical condition and/or operation to a specified standard, prevent further deterioration, replace or substitute a component at the end of its “useful life,” serve as an immediate but temporary repair, or assess ongoing maintenance requirements.
3. Capital improvements fall under specific criteria, too.
3. Capital improvements fall under specific criteria, too.
Basically, a capital improvement is performed to boost a property's condition beyond its original or current state. You undertake capital improvements when you wish to increase a property's useful function or service capacity, perform a required extension of “useful life,” enhance the quality of services, reduce future operating costs, or upgrade essential parts of the property. Examples can include modernizing the kitchen, major remodels, upgrading to energy efficient lighting, or any other major, value-adding improvements.
4. Sometimes, a maintenance job can turn into a capital improvement.
4. Sometimes, a maintenance job can turn into a capital improvement.
Surprises happen. Say, for instance, a roof has a leak, and a roofing company is called to repair it. After an evaluation, the roofing experts determine that the leaky area is beyond repair and, in fact, the entire roof needs to be replaced. While a roof repair would have been considered a maintenance expense, the necessary roof replacement has just become a capital improvement.
5. Know “useful life.”
5. Know “useful life.”
We spoke about this term earlier, so we want you to be clear about what it means. “Useful life” refers to its lifespan – the length of time that a system or piece of equipment is expected to serve its original purpose. Keep in mind that all of your property’s assets (like its security, mechanical and electrical systems) – as well as the property as a whole – have their own unique useful lives, which can span a wide range of timeframes. Useful life can be affected by a variety of factors, such as wear and tear, environmental effects, obsolescence (technical or commercial), revised compliance and safety regulations, and more. You can sometimes extend an asset’s useful life by performing work that improves the design or utilizes better materials than originally included. If you go this route, be sure to review the expenditure carefully so you can classify it correctly.
6. Take it case by case.
6. Take it case by case.
Categorizing an expenditure as either maintenance or as a capital improvement is a careful decision that should be made each time any type of maintenance, repair or renovations are performed. To get it right, consider the value of the asset, the intended goal of the work to be performed, the scope of work, the actual result and its impact on the asset’s value, depreciation and equity return.
Consistently and correctly applying the proper expense categorizations is not always easy, but it’s very worthwhile – and it will go a long way towards ensuring the ongoing financial stability of your property.
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