Glossary · DealProp
Capital expense vs. operating expense
The tax distinction between money spent improving a property (capitalized and depreciated over years) and money spent maintaining it (deducted in the year of the expense). Get this wrong and your CPA gets unhappy.
A capital expense (CapEx) is money spent acquiring or substantially improving a property — typically anything that extends the useful life of the property, adapts it to a new use, or increases its value. An operating expense (OpEx) is money spent keeping the property in its existing condition — routine maintenance, repairs, utilities, insurance, property management fees.
The distinction matters because the U.S. tax code treats them differently. OpEx is deductible in the year you incur it. CapEx must be capitalized — added to the property's basis — and depreciated over the property's useful life (27.5 years for residential rental, 39 for commercial).
Why it matters
A $5,000 roof replacement is capital. You add $5,000 to the property's basis and depreciate it over 27.5 years — a deduction of about $182 per year. A $1,200 roof patch is operating. You deduct the full $1,200 in the year you paid it.
The cash impact is the same; the tax impact is dramatically different. CapEx pushes the tax savings out over decades. OpEx gives them to you this year. For most small landlords with a tax bill they actually pay, OpEx is preferable in the year it happens — but you do not get to choose. The IRS does.
The hard cases live in the middle. A $300 sink replacement when the old sink was leaking? Operating. A $300 sink replacement when you decided to upgrade a serviceable sink? Capital. A $3,000 furnace replacement when the old furnace died? Capital (it is a major component). A $300 service on the same furnace? Operating. A $2,000 paint job in a unit between tenants? Almost always operating. A $20,000 kitchen remodel in the same unit? Almost always capital.
When in doubt, ask your CPA. The cost of getting one expense category wrong is small. The cost of getting it wrong on every expense for three years until an audit is much larger.
In DealProp
DealProp categorizes each expense by IRS schedule and flags ambiguous ones for your review. The default is to err toward OpEx (more tax-favorable) only when the work is clearly maintenance; otherwise it flags for CapEx and surfaces the rule. You can override any category in one click, and the audit trail shows who categorized what and when. See books & reports.