Capital Improvement Defined

WHAT IS A CAPITAL IMPROVEMENT?  

Some ordinances define capital improvements as both a replacement of an existing thing or a new improvement, while others only permit increases for new improvements. Other ordinances only permit increases for new elective (i.e. not necessary) improvements if they are approved by a majority vote of the park residents.

INTERNAL REVENUE CODE

The ordinance language should define what is meant by a capital improvement. The Internal Revenue Code can be used as a guide for distinguishing between a capital improvement and an ordinary repair. 


ORDINARY REPAIRS

Ordinary repairs should not be considered a pass-through. Pursuant to section 162 of the Internal Revenue Code, expenditures for ordinary and necessary repairs to business property can be deducted in the year paid. Where an expense is deductible, it should not be considered a capital improvement.

According to IRS Publication 527, a repair is something that keeps the property in good condition, and does not materially add to the value of the property or prolong its useful life. Examples are fixing gutters, repairing roof leaks or floors or replacing broken windows. These types of items should never be considered capital improvements.

IMPROVEMENTS

Improvements are defined by the IRS as work which adds to the value of property or prolongs its useful life. Examples are putting on a new clubhouse roof or room, or erecting a fence.

SIZE OF THE EXPENDITURE

The smaller the expenditure, the more likely that it will not be a capital improvement. Generally, the IRS defines any expense under $100.00 as a deductible expense.

INCENTIVES

An ordinance may give greater incentives for particular types of improvements through such variables as higher interest rates or shorter amortization periods for those improvements.

Source: The GSMOL Mobilehome Rent Stabilization Ordinance Handbook, Second Edition: Guidelines for Drafting and Enacting a Mobilehome Rent Stabilization Ordinance.

Prepared by: Bruce Stanton, Esq., Corporate Counsel

Image courtesy of Arvind Balaraman at freedigitalphotos.net