Operating vs. Capital Expense

[Irina K.]

After I bought a property, I had to replace the water heater right away as the old one was rusty and leaking. Of course I could not rent the property out without water heater being functional. Is it operating expense or capital expense?

Also the property did not have any kitchen appliances. Are they operating or capital expense?

Thank you,
Irina

[J Scott]

Just as a general clarification for the OP, there are no hard-and-fast rules for determining if something is an operating expense (OpEx) or a capital expense (CapEx).

In general, repairs and maintenance items are considered OpEx, whereas long-term improvements to the property are considered CapEx.

So, things like roof replacement, major remodels, full replumbing, etc, are clearly considered CapEx. And things like repairing a clogged toilet and mowing the lawn are clearly OpEx.

Of course, that leaves a whole lot of stuff in the middle: repainting an exterior, putting in hardwoods, installing new carpet, replacing a toilet, etc.

In fact, you could argue that if you remodel an entire bathroom, it's CapEx, but if you replace the toilet today, the sink next month, the tub the following month, the flooring the following month, and the lighting the following month, each expenditure is OpEx.

So, you can see that determining if something is OpEx or CapEx is not an exact science.

As usual, the IRS has chimed in and tried to clarify things, but they haven't done a very good job of it. Many things are still left up in the air.

So, as Bill suggested, perhaps just set a cut-off point ($1000 might make sense)...everything below is OpEx, everything above is CapEx. Or however you choose to make the determination, try to stay consistent.

Most importantly, talk to your CPA...he or she will likely have their own system that they use, and going by their guidelines will likely make preparing your annual taxes a bit easier.