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Updated over 7 years ago on . Most recent reply
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Why is CapEx not a part of operating expenses?
I'm reading an article, Top 21 Real Estate Investing Terms and Returns with Formulas, on some basic terminology. The author goes over what operating expenses are and lists examples, and everything seems normal expect that he explicitly states that CapEx should not be included in operating expenses. Why is this?
His definition is that operating expenses "include those costs associated with keeping a property operational and in service." The way I see it, buying a new roof for a property is definitely a cost that's required to keep the property operational and in service, and thus should be calculated into your operating expenses.
Can anyone shed some light onto why you shouldn't add CapEx into your operating expenses? Since this deals more in the bookkeeping realm, am I safe to imagine that these rules are pretty black and white when it comes to accounting (I admittingly slacked off my 2 semesters of accounting, regretting it now).
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Your monthly "allowance" for CapEx isn't an actual expense until you spend it.
Even when you do spend it, as @Jon Deavers mentioned, you can often depreciate the cost instead of expense it. Which route you go is up to you on the tax treatment. Expense will only impact this year's taxes; depreciate (can) increase the basis and impacts multiple years.