Many common interest community declarations include a capital improvements provision. Unfortunately, those same governing documents, and indeed the statutes in WA State, do not clearly define the term.
You will find definitions for capital improvements in a lot of places like Investopedia, IRS Publication 523 and in the IRS Tangible Property Regulations FAQ. RCW 64.90.485 helps define what capital improvements are NOT:
(ii) "Capital improvements" does not include making, in the ordinary course of management, repairs to common elements or replacements of the common elements with substantially similar items, subject to: (A) Availability of materials and products, (B) prevailing law, or (C) sound engineering and construction standards then prevailing.
The following definition of "Capital Addition or Improvement" sets clear parameters:
“Capital Addition or Improvement” means additions to the existing Condominium Property. This shall not include maintenance, repair or replacement of existing structures and Buildings, even if there are changes to or replacement of an existing material with different material. These do not include making, in the ordinary course of management, repairs to Common Elements or replacements of the Common Elements with substantially similar items, subject to: (A) Availability of materials and products, (B) prevailing law, or (C) sound engineering and construction standards then prevailing. “Capital Additions and Improvements” are defined as changes that:
a) correct a defect, design flaw or omission in construction that:
1) does not violate any applicable governmental mandates; and
2) does not pose a substantial risk of loss to the Association.
b) create an addition, physical enlargement or expansion;
c) create an increase in capacity, productivity or efficiency;
d) adapt the property to a new or different use;
e) create new components that are not replacements for existing components;
f) replace components that have not reached the end of their reasonable useful life (aesthetic, mechanical, or otherwise).
Your governing documents may also contain specific language about the Board's power to undertake capital projects. N.B. The language below (included in our example declaration) establishes a percentage of the annual operating budget instead of a fixed threshold.
The Board of Directors may not undertake any capital additions or improvements to the Common Elements in any one (1) calendar year costing in excess of one percent (1%), but less than three percent (3%) of the Association’s ratified annual budget, unless such expenses are approved by a majority of the total voting power of the Association. Any additions, alterations, or improvements costing in excess of three percent (3%) of the Association’s ratified annual budget require approval of sixty-seven percent (67%) of the total voting power of the Association.
Any additions, alterations, or improvements costing less than one percent (1%) may be made by the Board of Directors without approval of the Unit Owners, and the cost thereof shall constitute a common expense. If the Association spends less than the allowed amount in one (1) calendar year, that allowed amount not spent may be carried forward to the subsequent calendar year and combined with the allowance for that next year, without requiring special approval by the Unit Owners. The carry forward amount is invalid after the end of any subsequent calendar year.
HOW DO YOU PAY for capital improvements? ALWAYS Operating Funds.
1) new money (a special assessment or additional budget-line-item in future annual operating budgets)
2) existing, surplus operating funds that are part of your "cash cushion"; N.B. expending these funds will impact your full year surplus/deficit!
you can capitalize large expenses over time
3) borrow from reserves and repay reserve over time (as permitted by statute); you're ultimately paying with operating funds