Capital Expenses
I'm beginning to get a bit frustrated! My CPA states that items such as new carpet and gutters/downspouts are a capital expense. But I have a few friends that are acct's who argue that they do NOT extend the life of the structure (property). Can anyone clarify what are capital expenses and what constitute expenses in the eyes of the IRS? I appreciate any advice. Take Care.
I think everyone agrees that the cost of repairing your rental property is either a deductible expense or a capital improvement that needs to be depreciated. The difference between what is a capital improvement and what is considered a repair or maintenance seems to be a hotly debated topic among your CPA and accountant friends.
Expenses to keep your property in a normal operating condition, along with the labor and supplies needed to maintain the operating condition, can be fully deducted as a repair or maintenance.
However, costs that significantly add to the value of the property or appreciably prolong its useful life are capital improvements that must be depreciated.
The rule of thumb I follow isa repair fixes something that is broken,
maintenance keeps something in good working order, or maintains the appearance of the property, and,
a capital improvement replaces something that has worn out and has reached the end of its useful life.
Repairs and maintenance are deductible expenses. A capital improvement must be depreciated.When a component of your property -- permanent fixtures such as roof, gutters, plumbing, wiring, water heater, wall-to-wall carpet,etc. -- has reached the end of its useful life and needs to be replaced, it is depreciated as a capital improvement on its own depreciation schedule. It is probable that a rental property you have had in service for a long time will have several components under their own depreciation schedule at the same time.
In your situation, I suggest you keep listening to your CPA, and not discuss your business with your accountant friends.