Capital Improvement
A capital improvement is a permanent addition, alteration, or upgrade to a property that increases its value, extends its useful life, or adapts it to new uses. Examples include adding a room, installing new flooring, upgrading electrical systems, or landscaping that permanently enhances the property.
Example
“Adding the finished basement and extra bathroom qualified as a capital improvement that would increase the home's market value and reduce their tax burden.”
Memory Tip
Capital improvement = Improving your capital (property) - these are permanent upgrades that add value, not just fixing what's broken.
Why It Matters
Capital improvements can be added to your property's tax basis, reducing capital gains taxes when you sell and potentially increasing the property's market value and rental income. Unlike repairs, these improvements may also qualify for certain tax deductions or credits.
Common Misconception
People often think any money spent on a property is a capital improvement, but repairs that simply maintain existing condition don't qualify.
In Practice
Installing granite countertops to replace old laminate would be a capital improvement that increases value and can be added to your basis. However, fixing a leaky faucet or repainting walls in the same color would be considered maintenance repairs, not capital improvements.
Etymology
From Latin 'capitalis' (principal) and 'meliorare' (to make better), describing enhancements that better the principal asset rather than just maintaining it.
Common Misspellings
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