CapEx
Capital expenditure
Capital expenditure is money spent on components with a useful life longer than a year — roof, furnace, windows, a full kitchen. It is not deducted in the year you spend it; it is added to basis and depreciated. In underwriting, a CapEx reserve of 5% to 10% of gross rent is set aside monthly so the eventual bill is already funded.
CapEx reserve = gross scheduled rent × reserve percentage
Worked example
5% of $31,800 of scheduled rent puts $1,590 a year, $133 a month, into the reserve.
Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.
The mistake to avoid
Where this is calculated
The rental property depreciation calculator computes this from your own numbers and shows the arithmetic expanded. 27.5-year straight line with the IRS mid-month convention, the annual tax shield, and recapture at sale.
Related terms
- Cost basisCost basis is what the IRS considers you to have invested: purchase price plus capitalised closing costs plus improvements, less the land value for depreciation purposes and less depreciation already taken.
- Depreciation recaptureDepreciation recapture is the tax owed at sale on the depreciation you deducted along the way.
- 1031 exchangeA 1031 exchange defers capital gains tax and depreciation recapture by rolling the proceeds of an investment-property sale into another investment property.
Back to the full glossary — 20 terms with formulas and worked examples.