Capital expense or current expense?

[ROI]

I had several large expenses in 2013 and not sure if it is capital or current expense?

• Replace roof: the roof was leaking, too old and has to be replaced
• Add insulation to attic: the original insulation was too think and not enough so that it cause ice damming
  Replace hot water tank: the tank was too old to work properly and has to be replaced
  Replace furnace: it had to be replaced because the engine did not function and cannot be fixed.

I tends to treat them as current expenses as all above work needed to get done to just make the house run properly. Any opinions are appreciated.

 

[Thomas Beyer]

The are usually capitalized, except perhaps hot water tank as that one is replaced more regularly.

 

[Sherilynn]

As a general guideline: if you are bringing the item back to its original condition (or perhaps today's equivalent), then it could be a current expense; but if you are improving the item, then it is a capital cost.



For example:

o if you are replacing asphalt shingles with new asphalt shingles - current.

o if you are replacing asphalt shingles with aluminum roofing tiles - capital.

o Likewise, furnaces technology hasn't changed all that much, so replacing a mid-grade furnace with a mid-grade furnace could be an expense. Upgrading to a high-efficiency would be capital.



Windows are trickier because the technology has changed so much. Wood-framed windows were once the standard, but now double-paned vinyl windows are the minimum standard. So there are arguments both ways for double-paned vinyl being current expenses, whereas upgrading to triple-pane would obviously be an improvement and therefore a capital cost.



Best to consult an accountant experienced with real estate investment. If he feels confident presenting your case, then you should be fine.



BTW, any work done to a newly-purchased property to bring it up to a rentable standard is considered to be part of the building cost (capital) rather than a current expense.

 

[Thomas Beyer]

Usually CRA looks at the size of the expense too, so a roof for $25,000 might not be an expense, although indeed you are just replacing the roof, and not installing a better one.

 

[Sherilynn]

Good point, Thomas.