What does the term 'capital expenses' refer to?

The term 'capital expenses' refers specifically to costs that enhance the value of a property or extend its useful life, which ultimately can lead to increased revenue over time. These expenses are typically significant investments in the property such as renovations, major repairs, or improvements, rather than regular operational costs.

When it comes to tax purposes, capital expenses can be deducted from rental income, but they are usually treated differently than ordinary business expenses. While operational repairs are deducted in the year they are incurred, capital expenses are often amortized over a number of years. This is because they contribute to the long-term value of the property rather than being seen as routine upkeep.

In the context of the other choices, operational repairs would not qualify as capital expenses because they are more about maintaining the current functionality of a property rather than enhancing it. Employee salaries are classified as operational expenses and do not fall under capital expenses, as they relate to day-to-day business operations. Similarly, costs associated with tenant improvements may sometimes be capitalized, but not all improvements are classified this way; it depends on the nature and extent of the improvements.

Thus, the focus on how capital expenses are deducted for tax purposes provides clarity on their classification and significance in property management.