Wondering, “what does capital improvement mean?” It’s a strategic, long-term investment you make to significantly strengthen your position in the market, efficiency, and lifespan.
If you’re thinking about remodeling your property’s kitchen, adding another bedroom to your rental property, or even installing solar panels or upgrading your electrical systems, those are capital improvements. But what are the key benefits that make it worth the investment? Continue reading to find out.
Key Takeaways
- Capital improvements are strategic long-term investments designed to increase a property’s value, efficiency, and lifespan.
- There are key differences between capital improvements and repairs, with repairs being reactive in nature and capital improvements as planned and intentional.
- Capital improvements offer an array of tax advantages, boost property value, and increase profitability.
What Does Capital Improvements Mean for Landlords?
Capital improvements refer to significant developments, upgrades, and enhancements you add to a property to improve its value, functionality, efficiency, and even lifespan. These are typically long-term projects specifically planned to enhance the property’s overall condition.
And, unlike periodic repairs and maintenance work, capital investments are particularly designed to contribute to strengthening the property’s income potential, encouraging business growth.
As the premier property services of Austin, we think of it as a way to make your rental property not only look better–but also run more efficiently and boost your tenant satisfaction.
Examples of Capital Improvements for Landlords
Some examples of capital improvements for landlords include major system upgrades, energy-efficient features, modernized interiors, and added living spaces to boost your property value and rental income.
To answer “what does capital improvement mean” in more detail, let’s take a look at the most common examples. First, we have systems replacements. This includes roofing, HVAC, plumbing, and the like. Completely overhauling and upgrading these systems, instead of periodically repairing them for maintenance, can improve the property’s lifespan and operational efficiency. On top of this, upgrading plumbing and electrical systems (changing to galvanized pipes, upgrading to higher-grade electrical panels, etc.) also allows you to meet modern safety codes and insurance requirements.
In relation to this, another common improvement strategy we’ve noticed is to adopt energy-efficient and sustainable property features. For example, think changing to new, larger windows for better ventilation, upgrading property insulation, and installing smart tech features. These can not only make your property more cost-efficient, but also make it more attractive to eco-conscious tenants.
Aside from this, we’ve found that landlords also commonly upgrade kitchen and bathroom features as part of their capital improvement investments. This includes installing new cabinetry, fixtures, lighting, and even flooring to refresh and modernize the space.
Lastly, we’ve often seen landlords make structural improvements, such as adding supplemental bedrooms, bathrooms, and other livable spaces. This provides tenants with more functional space, allowing you to increase your rental prices as well as boost your property value.
Capital Improvements vs Repairs: Key Differences
Capital improvements are planned, long-term upgrades that add value and longevity, while repairs are reactive fixes required to maintain habitability.
To go more in-depth, a common misconception with capital improvements in rental properties is that they are no different than doing repairs essential to maintaining the property. However, that is not exactly the case. In the simplest terms, property repairs are reactive, meaning that you do them when there’s a problem that needs fixing. For example, a leak on the roof, a broken heater, and the like.
On the other hand, capital improvements are planned and strategic. You purposefully do capital improvements to add value and enhance the property’s longevity. So, you’re not only fixing one problem or addressing a singular maintenance issue.
Instead, you’re strategically implementing enhancements and upgrades with the goal of improving rental performance and enhancing tenant experience. In addition to these, repairs and maintenance are required by law to ensure habitability, while capital improvements are not mandatory unless they are necessary to meet new building codes and safety standards.
From a more technical standpoint, the Internal Revenue Service (IRS) points out a key determination on what is considered a capital improvement and regular repair/maintenance work. Under IRS Publication 523, which talks about conditions of selling a home, capital improvements must either be permanent or durable (last for more than a year upon completion).
Benefits of Capital Improvements (Tax Benefits & Property Value)
To put it quickly, capital improvements can boost your property value, rental income, and long-term tax benefits through depreciation and reduced capital gains.
To get more into it, you might be wondering, what does the IRS have to do with capital improvements? Well, adding capital improvements can offer you certain tax benefits and more. First and foremost, the capital improvements you make to a residential property are capitalized and depreciated over time.
This means that instead of getting a one-time large deduction for the major improvement, it’s spread over several years. In fact, costs are spread over a whopping 27.5 years for residential rental properties. Aside from this, capital improvements also increase your depreciable basis, which means that you have larger annual depreciation deductions and more write-offs over time.
Aside from these, another benefit of capital improvement is the possibility of tax deferral when you decide to sell the property later on. How this works is when you have a lower taxable capital gain due to the higher cost basis, you also have less tax owed at sale. This gives you an opportunity to boost revenue when you execute your exit strategy.
Similarly, capital improvements also have a massive impact on property valuation. Any major upgrades – from modernized interiors to new roofs, plumbing, electrical, and the like – can greatly boost your property’s market value. Think of how adding a pool can greatly appreciate your rental property. The same concept works when you apply other forms of capital improvements.
Other than these, there are more practical ways for a landlord to benefit from capital improvements. Particularly, such changes will allow you to increase rental income. Also, you can expect fewer repair and maintenance requests since systems are pretty much in their best condition.
A Disclaimer
We’re only providing general information in this article for educational purposes only. While we aim for accuracy and reliability, the information shared is not meant to be relied on as legal, tax, financial, or specific regulatory advice. We strongly recommend that you always consult with a licensed attorney, CPA, or other qualified professional in your specific jurisdiction for advice tailored to your unique circumstances, as reading this blog does not establish a client or advisory relationship with BMG.
How Bay Property Management Group Can Help
As a landlord looking to scale your rental business, taking steps toward capital improvements can slowly ensure your long-term success. Whether it’s as simple as installing smart thermostats or completely remodeling the kitchen or overhauling your plumbing system, such improvements can help you increase market value, boost tenant satisfaction, and ensure longevity.
However, planning and executing capital investment projects can be a lot more challenging than you expect. This is where we at BMG step in. As one of the top apartment management companies Austin landlords trust, we can provide you with critical support. From providing valuable insights on which improvements could have the best ROI to coordinating with contractors and responding to tenant concerns, we can handle the day-to-day of running a rental for you. Interested? Contact us today!
