Capital Improvement

What is Capital Improvement?

A Capital improvement will be any addition or alteration of Real Property, which meets the three conditions such as

• It considerably adds value for the real property or appreciably lengthens the use of real property
• It becomes the part of the real property so that the removal would cause material damage to the property
• It has intentionally become a permanent installation

For instance, building a deck, installing kitchen cabinets or installing a hot water heater all comes under capital improvements projects. Repairing a broken step, painting existing cabinets are examples of taxable repair and maintenance work.

Purchases of Materials

Building materials are the tangible personal property purchased for capital improvement work. They are taxable whether it is purchased by a contractor, subcontractor, repairman or homeowner. If the Sales Tax is paid by the contractors, then it can be an expense which can be passed through to the customer as part of the overall charge for the capital improvement.

Contractors do not sell building materials to the consumers. For example, a contractor is hired to build a house a contract wants the contractor to give certain appliances such as a refrigerator, washer or dryer. The installation of these appliances does not become a part of the real property. Although, the contractor must collect the sales tax form the customer for the appliances.

Leasehold Improvements

If there are additions and alterations in the real property made for a tenant and not for the property owner may be considered as temporary in nature. Certain work may qualify for capital improvement and may not qualify if the tenant Lease does not transfer ownership for the improvement of the property.

For instance, if someone requires leases to return the property to its original state when the lease expires. This is installed over the term of the lease and can be considered as permanent, it will be removed if the tenant moves. And, the work performed cannot qualify as a capital improvement.