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Current expenses or capital expenses?
Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. However, an increase in a property's market value because of an expense is not a major factor in deciding whether the expenses are capital or current.
To decide whether an amount is a current or a capital expense, you should answer the following questions:
| Criteria | Capital expenses (read Capital expenses - Special situations) | 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 a property or for a separate asset? | The cost of replacing a separate asset within that property is a capital expense. For example, the cost of buying a refrigerator for 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. |
| 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 considerable in relation to the value of the property, it is a capital expense. |
This test is not a determining factor by itself. You might spend a large amount of money for 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, and you deduct it as a current expense. |
