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Accounting For CapEx Can Increase Your Cash Flow At Tax Time
Accounting for capital expenditures saves you money because it delays tax payments.
What is a capital expenditure?
Capital expenditures occur when you:
Spread the cost of the expenditure (the fixed cost) over the useful life of the asset.
Accounting For CapEx
How can you spread the cost of something over its useful life? You do this by accounting for depreciation of capital expenditures. Depreciation essentially accounts for the wear and tear of property as an expense each year, which reduces taxable income on your income statement and lowers your taxes. There is cash based accounting and double entry accounting. Double entry accounting is good for you because you get to reduce your expenses on paper each year paying less tax. In real estate, I recommend using double entry accounting - and you might have to legally in your jurisdiction - because of tax laws.
The advantage of budgeting for capital expenditures is that you can invest the money that you save from paying taxes and earn a return elsewhere until it comes time to sell the property.
The downside of accounting for capex is that you can get shocked with a tax bill when you sell your property and there is a difference between the price and the depreciation. Plan for taxes when you are going to sell property. You can do this by knowing the types of capital expenditures for apartment buildings and houses.
Types of Capital Expenditures For Apartment Buildings and Houses
Depreciating a capital expenditure is also called capitalization. This is a good chart for budgeting for various capital expenditures.
- Interest payments can be capitalized over the life of a building.
- Since HVAC systems can last 15-20 years and are equipment, they can be capitalized.
- Washer and dryers can be capitalized.
- Improvements such as electrical wiring, plumbing and lighting can be capitalized.
Types of Capital Expenditures For Apartment Buildings
- Elevators, cleaning equipment, parking lots, and appliances are examples of capital expenditures that differ from houses.
Tax jurisdictions treat taxes when you sell due to capex differently. There are strategies to delay paying taxes when you sell in some jurisdictions like buying more property with funds from a recent sale.
I highly recommend having a tax professional on your team so that you know what can be capitalized and what can’t and to plan for taxes when selling a property.
Do capital expenditures make your deal worth doing?
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