Capital Expenditures (aka: CAPEX) are generally defined as a business expenses acquired to create future profit. In commercial real estate, capital expenditures are related to material improvements or upgrades to the property. Examples include a new roof or HVAC. These items are added to the basis of the property and then can be depreciated over the holding period. Distinguished from cash outflows for expense items such as new paint or plumbing repairs (operating expenses) that can be expensed in the year they occur.
It is easy to differentiate between capital and operational expenditures if you consider them in terms of time. Capital expenditures pertain to the future, while operational expenditures deal with the present. The IRS’ rules for how to determine whether to treat expenditure as a repair or a capital expenditure change for everyone in 2014. The new rules require owners to look at repair costs relative to the value of systems of the building, rather than relative to the cost of the entire building.