A capital improvement is a major change to a property, such as adding a new roof, replacing windows, or building an addition. Unlike repairs, which simply keep the property in good working condition and are deductible in the year they occur, capital improvements must be depreciated over the useful life of the improvement.
How It Applies to Florida Landlords
Florida landlords often face unique maintenance requirements due to the climate, such as installing impact-resistant windows or replacing roofs damaged by hurricane seasons. These are classified as capital improvements. By distinguishing between a repair (like fixing a broken window) and a capital improvement (replacing all windows with hurricane-grade units), a landlord can correctly maximize their tax benefits. Improvements also increase the property's adjusted basis, which can reduce capital gains tax when the property is eventually sold.
Key Takeaways
- Capital improvements add value or extend life; repairs maintain it.
- Must be depreciated over time rather than expensed immediately.
- Significantly impacts the adjusted basis of the property.
- Keep detailed logs and invoices to substantiate these costs during tax season.