After completing a project at your rental properties, you may wonder whether it should be reported as an expense or Capital Expenditure (CapEx). Each designation has accounting impacts: You can write off repair and maintenance expenses immediately, but have to take depreciation into account for CapEx. Therefore, making the correct decision is important not only for the compliance reasons, but also for maximizing your tax benefits. Don’t guess! Azibo is here to help you make informed, wise decisions.
Rule of thumb by the dollar amount:
If the invoice or each single item on the invoice is less than $2,500, you can choose Repairs & Maintenance and book 100% of the cost as Expenses.
If each single item on the invoice equals or is greater than $2,500, choose CapEx.
Repairs & Maintenance are smaller expenses that entail upkeep or replacement for smaller parts of the home. Examples include:
- an existing HVAC system
- a faucet or toilet
- a few parts of flooring
- a few shingles on a roof
- a cabinet door
- a few planks or tiles on a floor
- a broken pipe
On the other hand, Capital Expenditures are larger renovations or additions to a property that affect the property value. Example include:
- An additional room or deck for the property
- Redoing the kitchen, bathroom, electrical, plumbing, etc.
- Installing a new pool, roof, HVAC system, flooring, etc
- 30%+ of an existing building components mentioned above
Exceptions for the dollar amount-based rule:
Some costs are always categorized as CapEx according to the accounting rules. For example:
- Repairs in house flipping, even when the amounts are small
- Inspections for a house purchase that are part of the closing cost and should be depreciated
We hope that helps clear things up. Please consult with your CPA if you have any questions.