Capital expenses, often referred to as CapEx, are substantial costs a business incurs to either buy, maintain, or improve its fixed assets such as buildings, vehicles, equipment, or land. In the context of the real estate investment industry, these are major improvement costs that extend the life of the property or increase its value.
Examples of capital expenses include:
- Structural Improvements: This includes costs related to renovating or rehabilitating a building structure such as the roof, walls, foundation, or flooring. These could also include adding new structures to the property.
- Systems and Infrastructure: Expenses related to improving or replacing the building’s systems and infrastructure such as HVAC systems, electrical and plumbing systems, and others.
- Major Renovations: This includes costs of significant upgrades to the property, like modernizing a kitchen or a bathroom, adding a room, or changing the property’s layout.
- Land Improvements: These can include landscaping, paving, fencing, outdoor lighting, and other similar improvements.
These costs are not written off in the year they are incurred. Instead, they are capitalized and depreciated over the useful life of the asset in accordance with IRS guidelines. This is a key difference between a capital expense (CapEx) and an operating expense (OpEx). Operating expenses are the regular, day-to-day costs of running a property and can be fully deducted in the tax year they are incurred. These can include costs like utilities, maintenance, property management fees, and property taxes.