Tax Tip Thursday
Rental Property Deductions
Do you know the difference between a capital expense and a current expense? People often get these two confused, so I created this handy table to help you figure it out. This is not a comprehensive guide! If this table does not answer your questions I will be happy to help you. Just call or set up an appointment!
| Criteria | Capital Expenses | Current Expenses |
|---|---|---|
| Does the expense provide a lasting benefit? | A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden house is a capital expense. | A current expense is one that usually recurs after a short period. For example, the cost of painting the exterior of a wooden house is a current expense. |
| Does the expense maintain or improve the property? | The cost of a repair that improves a property beyond its original condition is probably a capital expense. If you replace wooden steps with concrete steps, the cost is a capital expense. | An expense that simply restores a property to its original condition is usually a current expense. for example, the cost of repairing wooden steps is a current expense. |
| Is the expense for a part of the property or for a separate asset? | The cost of replacing a separate asset within a property is a capital expense. For example, the cost of buying a refrigerator to use in your rental operation is a capital expense. This is the case because a refrigerator is a separate asset and is not a part of the building. | The cost of repairing a property by replacing one of its parts is usually a current expense. For instance, electrical wiring is part of a building. Therefore, an amount you spend to rewire is usually a current expense, as long as the rewiring does not improve the property beyond its original condition. If it does, then it is a capital expense. |
| What is the value of the expense?
Use this test only if you cannot determine whether an expense is capital or current by considering the three previous tests. |
Compare the cost of the expense to the value of the property. Generally, if the cost is of considerable value in relation to the property, it is a capital expense. | This test is not a determining factor by itself. You might spend a large amount of money on maintenance and repairs to your property all at once. If this cost was for ordinary maintenance that was not done when it was necessary, it is a maintenance expense that is deducted as a current expense. |
| Is the expense for repairs made to used property you acquired to put in a suitable condition for use? | The cost of repairing a used property you acquired to put in a suitable condition for use in your business is considered a capital expense even though in other circumstances it would be treated as a current operating expense. | Where the repairs were for ordinary maintenance of a property you already had in your business the expense is usually current. |
| Is the expense for repairs made to an asset in order to sell it? | The cost of repairs made in anticipation of selling a property, or as a condition of sale, is regarded as a capital expense. | Where the repairs would have been made anyway, but a sale was negotiated during the course of the repairs or after their completion, the expense is considered current. |
If you’re not sure what your expenses qualify as, I am happy to help you out. Give me a call or set up an appointment!
Disclaimer:
This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.