Is Landscaping a Capital Improvement?
A common question asked during property renovations is is landscaping a capital improvement? The short answer is that yes, landscaping that improves the property’s outlook and resale value is classified as a capital improvement, BUT, repairs and maintenance projects are not classified under capital improvement.
As always the devil is in the detail, so let's take a look at some definitions:
The Difference between Capital Improvement and Maintenance
A capital improvement project usually has the following qualities:
- The project will add substantial worth to the current market value of the property.
- Implementing the project helps prolongs the life of the property
- The project will be a permanent part of the property
- Removing the project after its completion will damage the property itself and not just the installation.
In comparison, repairs and maintenance projects are work done on the property to keep it at the desired state.
This makes most of the routine tasks done by the landscape industry part of the repairs and maintenance category. This is mainly due to the reason that the green aspect of landscaping is dynamic and requires ongoing maintenance.
Regular activities like mowing, trimming, weeding, small hardscaping repair, and periodic inspection and repair of lighting and irrigation systems are necessary to maintain consistent quality.
Capital Improvement, according to the IRS
The IRS publishes its guidelines in its PDF for "Selling Your Home" publication 523, cat no. 15044w. The PDF is about 20 pages long, so not terribly laborious to read through and we highlight the relevant sections below.
From the document the Internal Revenue Service IRS classifies capital improvements as activities that:
- Add to the value of your home
- Prolong its useful life
- Adapt it to new uses
To be sure about what classifies as a capital improvement, it is best to confirm with a tax professional or your accountant.
However, from the PDF above the relevant part for us starts on page 9, where they set out what is a capital improvement:
You can see the landscaping is clearly defined as a capital improvement.
However, we need to be careful, examples of work that you CAN'T include are:
- Any costs of repairs or maintenance that are necessary to keep your home in good condition but don't add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware
- Any costs of any improvements that are no longer part of your home(for example, wall-to-wall carpeting that you installed but later replaced.
- Any costs of any improvements with a life expectancy when installed of less than 1 year.
Landscaping for Environment-Friendly Features
If the building’s landscaping is over a decade old, it is probably not at its optimum environmental friendliness. In the case of commercial properties particularly, property landscaping years required a lot of water, fertilizer, and pesticides for control. Updated landscaping is more oriented toward saving water, chemical fertilizer, and pesticide usage.
For instance, updated landscaping will remove water-intensive plants with low-maintenance plants that need fewer pesticides and fertilizer to flourish.
Similarly, old-fashioned water-intensive systems are replaced with drip irrigation and water-saving hardware that prevents water wastage. Old cement hardscape can be replaced with porous paving that handles water runoff without wastage.
These examples are great initiatives and usually tax-deductible, allowing you to save in taxes and capital outlay on property maintenance in the long run.
Landscaping: Outdoor Common Areas
A common area can be a key attraction in property developments to help get better tenants and customers.
Common areas in commercial buildings can be a place to have lunch, take a break, or even to have a quick walking meeting in the fresh air.
In residential buildings, such as apartment blocks, condominiums or even gated communities, the outdoor setting is popular for people to relax or socialize.
Setting up an outdoor dining space, BBQ grill points, and bonfire pits help add to the property’s draw and helps keep residents happy.
In case your target demographic is based on young kids, setting up a play area, splashing pools along with fountains and seating areas makes for a fun place for young families to hang out.
Common area patios are also a great feature for commercial properties like retail centers as they can be a welcome area to rest in the sun or shade.\
The trend in green landscaping is to opt for a more casual and interesting mix of flowering and evergreen shrubs. These are coupled with perennials and decorative, colorful wild grasses.
Designing green spaces with a layered look, with smaller plants in the foreground or center, medium height plants in the middle or next in the space, and tall shrubs and trees at the back or last circle allow for a structured and sleek look. Adding in benches and rustic seating allows for people to have a space to enjoy a natural setting.
The Landscaping Elements that DO (and Don’t) Qualify as Capital Improvements
Remember that not every landscaping or greenery replacement project can be classified as a capital improvement. The routine replacement or upkeep of a property’s green areas is considered maintenance and will not be capital improvements. Activities that keep your property maintained are necessary for property reputation.
Hardscape additions that are large in scale and are a significant expense are usually taken as capital improvements.
This means that if you are adding hardscaping to areas that were bare before, otherwise, if the old hardscape is replaced with a new one would be just maintenance and not a capital improvement.
Developing areas where employees can gather or a façade redesign to uplift the building will be a capital improvement. The façade redesign needs to be permanent and long-term. Similarly, a lighting project that replaces old lighting systems with solar power systems or energy-saving systems and helps reduce fire risk and maintenance could qualify as a capital improvement.
Replacing old irrigation systems with new ones will depend on the scope and expense of the project itself. Adding an irrigation system to an unattended area will be a capital improvement.
At the end of the day, the landscaping project's scale and its expense determine its classification as a capital improvement or just routine maintenance.
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