A capital improvement, as the name suggests, is any property enhancement—or "improvement"—that increases its overall value—or "capital." Capital improvements can be undertaken by individual owners as well as co-op or condo boards. The range of what constitutes capital improvements is vast. Installing a new window in the bathroom of a single unit is a capital improvement; so is installing a new roof for every tower in Co-op City.
Whether or not an improvement is considered capital or not is important for one reason and one reason only: money. How an improvement is classified has a pronounced effect on taxes, both individual and collective. In some cases, it is more prudent to have an enhancement classified as a capital improvement. In other cases, it is more prudent to write the cost off as a simple business expense. In the case of a co-op, the former is usually preferable—but not always.
Not Always Black-and-White
Interior design is more of a gray area in terms of capital improvements. Often, some aspects of an interior design project—like upgrading electrical systems, or installing new walls and windows—are considered capital improvements, while others—such as fresh paint—are not.
Complicating matters is the fact that the tax codes governing co-ops are vastly different from the ones governing condominiums. A new roof, for example, is a capital improvement in a co-op, but not in a condo.
Before you vote on whether or not to proceed with an interior design project in your building or individual unit this year, find out whether it classifies as a capital improvement. The answer will have far reaching effects—both potentially negative or potentially positive—on your bottom line.