When planning projects in your home, it can be difficult to differentiate between repairs and improvements, and it can be confusing to understand how these projects are affected by tax codes. How is replacing some tiles different from renovating a rooftop? What can be deducted from your taxes every year, and what can’t? Why does a capital investment increase the value of your property, but a repair does not?
This guide is intended to explain what a capital investment is, what a repair is, common examples of both, and how they affect your taxes differently.
Capital Investments – What Are They?
A capital investment is any project that makes your property either more valuable or improves the home in some way. It adds additional functionality to the property and upgrades the assets it already has or, it adds entirely new assets rather than maintaining them as they are.
Essentially, if you improve the property, change the property, significantly upgrade the assets of the property or restore the property to a near-new condition: it’s probably a capital investment.
Some examples of common capital investments include roof replacement, kitchen redesign, installation of new systems on the property, construction of a new room, or replacing and upgrading major appliances. These upgrades serve to increase the value of the property by adding new assets and will increase the value of your home over time.
Repairs and Maintenance – What Are They?
A repair or a maintenance project is a small, one-time fix that keeps the property functional as it is and does not add any lasting value to it. A repair does not aim to change the habitability or the cost of a home, rather it aims to maintain the property in its current state of habitability and value.
Any project that is relatively cheap, one-off, short-term and only seeks to restore a part of the property to its previous state counts as a repair.
Some examples of common repairs include replacing broken glass in a window, cleaning drains, repairing an electrical outlet, fixing holes in the wall, painting the exterior of your home, or deep-cleaning carpets. These projects add no significant value to the home, and just keep the property from falling into disrepair.
What’s the Difference?
The big difference between capital investments and maintenance is the intent. The intent of a capital investment is to spend a lot of money on an upgrade so that eventually the property’s value rises, and that investment shows a higher return. The intent of a repair is to keep a property in its current condition by doing small maintenance projects to keep the property up to date and functional.
For some projects, it is hard to classify which term they fall under: painting projects are one such example. Painting can be classified as a repair if it is small-scale, such as repainting a room or a fence, but it can also be classified as a capital investment if the purpose is to make the home more attractive from the outside or if painting is being done on an addition to the property.
When beginning a project to make any change to your property, carefully consider what the purpose of your project is: do you want to make your home more valuable, or do you simply want to maintain its current state.
How do taxes apply to these projects?
Capital Investment projects are typically very expensive and take a long time to complete. You will not be able to get a deduction the year that the project is started because the point of a capital investment is to continuously improve the value of your home over time. Instead, you will be able to deduct certain costs from the property’s taxable income over a few years.
Repairs are typically cheaper and more minor and can usually be completed within a short time frame. The cost of non-capital repairs can be deducted from your tax liability in the current year, making it slightly less burdensome to maintain rental properties or complete projects at home.
It is important to keep continuous and organized records of all of your expenses and tax returns, whether you are doing a capital investment or a repair. You will save yourself a massive headache if you continuously track the costs of your repairs or the depreciation of your capital investments.