Capital Improvements refer to any significant expenses incurred to enhance the value, extend the lifespan, or adapt a property for a new use. These are substantial, non-recurring expenses that are not part of regular maintenance or repair.
Examples of capital improvements can include adding a new bathroom, replacing the entire roof, installing a new HVAC system, upgrading the electrical or plumbing systems, or other structural changes that add value to the property.
These improvements are often capitalized, meaning their cost is spread out over the estimated life of the improvement, and deducted from taxable income over a series of years (through depreciation), rather than being fully deducted in the year they were incurred. This can have significant tax implications for real estate investors.
It’s also important to note that capital improvements are typically differentiated from “repair and maintenance” costs, which are routine expenses to keep a property in its current condition, and which can often be fully deducted in the year they were incurred.