A capital improvement is any addition or alteration to real property that meets all three of the following conditions:

• It substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property.
• It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself.
• It is intended to become a permanent installation.

For example, building a deck, installing a hot water heater, or installing kitchen cabinets are all capital improvement projects. Repairing a broken step, replacing a thermostat on a hot water heater, or painting existing cabinets are all examples of taxable repair and maintenance work.

Purchases of materials

Building materials and other tangible personal property purchased for capital improvement work are taxable, whether purchased by a contractor, subcontractor, repairman (hereafter contractor), or homeowner. The sales tax paid by contractors becomes an expense that can be passed through to the customer as part of the overall charge for the capital improvement.