Better known as capital expenditures or improvements, they can include major undertakings such as replacing carpets, major lighting or landscaping projects, pool deck renovations, security system upgrades or replacements, exterior painting, painting of garages, stairs or walkways, and many more. For example, replacing a car battery falls under repairs. However, major problems, such as replacing a transmission or engine, fall under capital expenditures. Keep these differences in mind when investing in a company car to ensure that you enhance its value and that of your property.
Once your property is in service, you will need to determine whether each repair and maintenance expense you incur should be classified as an ordinary expense or as a capital improvement to be capitalised and depreciated. Common capital expenditures for a real estate asset, such as rental properties and commercial real estate, include improvements to the property such as renovations and major repairs. Some major repairs made to improve and maintain the property include replacing the roof, windows or siding. A capital expenditure is intended to upgrade the component to a like-new condition or to extend the useful life of the asset.
The purchase of certain equipment to be used in the operation of a real estate investment company would also be considered a capital expenditure. It is essential to distinguish between repairs and capital improvements, as there is a fine line of difference. Obviously, painting, wallpapering and redecorating do not count as capital improvements, but what about substantial repairs to a house? Generally, the answer is "no," as the IRS does not consider work that restores something to its original condition, no matter how extensive, to be a capital improvement. Fixing a leaky roof is not a capital improvement if it is only replacing a few shingles.
If the entire roof is replaced, it is a capital improvement, as the replacement is not a restoration. The same is true if the repair is a structural improvement, such as replacing the foundation so that the house does not collapse. A good example, as provided by the CRA folio mentioned above, is the replacement of a spark plug versus the replacement of the entire engine of a vehicle. Replacement cost is a term that refers to the amount of money a company must currently spend to replace an essential asset, such as real estate, an investment security, a lien or other item, with another of equal or greater value.