What is a capital improvement?
A capital improvement is a major or important improvement, change or renovation of parts of property such that it increases the value of the property or enhances its usability and durability. Maintenance jobs such as repairing roof leaks do not qualify as capital improvements. Capital improvements on a property can also be referred to as capital expenditure.
The Internal Revenue Service of the United States has stated that improvements on a property that can qualify as capital improvements must be able to last for at least a year after its completion. Automatically, this implies that not all improvements on a property can qualify.
The purpose of making capital improvements on a property is to enhance its market value or durability. For instance, applying a new painting on a property will attract more buyers or rentals or both. This also means that the value of the property will be increased by taking into consideration the amount expended on repainting the building.
In addition to an increase of the property value, capital improvements help to reduce the taxable profits on the property when it is sold. The amount expended on capital improvements is deductible from the capital gains before tax.