While it’s no secret that home improvements can increase your home’s value, some improvements may have tax benefits. The line between home repairs and home improvements can be thin, so it’s important to know the difference when it comes time for tax deductions. This guide will outline the difference between home repairs and improvements and help clarify which improvements are tax-deductible.
Home repairs vs. home improvements
The IRS Publication 523 identifies a home improvement as something that adds value to your home, adapts it to new uses, or prolongs its life. At first glance, a home repair and home improvement can seem interchangeable. However, home improvement expenses can help offset taxes when selling your home while home repairs cannot.
For tax value, an improvement has to contribute to a property’s overall value instead of simply being made to maintain general upkeep (i.e. replacing a broken shower head would be a home repair, but adding an addition and increasing the home’s square footage would be a home improvement).
Here are a few examples of home improvements for capital gains:
- Adding an addition
- Installing a new roof
- Adding a swimming pool
- Replacing an HVAC system
- Finishing a basement
- Building a master suite
- Adding bedrooms or bathrooms
Some examples of home repairs include:
- Painting a room
- Repairing items that are damaged, such as a leaky faucet or broken window
- Replacing a cracked window
- Updating any hardware within the home
- Replacing the carpet
How to deduct taxes on home improvements
When it comes time to sell your house, you’ll add the total cost of your home improvements to the tax basis of your home. Then, you’ll subtract the tax basis from the sales price to calculate your total profit. Speak with your tax advisor and attorney to determine if you qualify for this type of deduction and if there are any relevant tax laws you should know about.
If you’re not planning on selling in the foreseeable future, there are other home-related expenses such as energy upgrades, home office improvements, or rental depreciation which may qualify for certain deductions.
What home expenses are tax-deductible?
In addition to making home improvements, there are other home-related tax deductions that can help you recoup some of your home costs. To gain a better understanding of what these are, obtain legal advice and discuss your full tax situation with your financial advisor. Before you ask your advisor, “Are home improvements tax-deductible?,” educate yourself on the possible deductions.
- Energy efficiency upgrades—Any upgrades to your home to help make better use of renewable energy may qualify for a tax deduction. This deduction is through the Nonbusiness Energy Property Tax Credit. These upgrades may include solar panels, solar-powered water heaters, or wind turbines.
- Home office improvements—If an area of your home is used for business purposes, you may be eligible to deduct these business expenses. To qualify, the improvements must be made to the parts of your home that are used for business.
- Rental property improvements—Improvements made to add value to a rental property, or expenses you’re required to pay to maintain a livable space for tenants, can be tax-deductible.
- Home depreciation—According to IRS Publication 527, home depreciation due to business purposes or rental space, can be tax-deductible. For example, if your living room serves as your company’s office, or your first-floor bedroom is a rental unit, you may be able to claim depreciation.
- Medical care improvements—If you need to make home improvements to accommodate a medical condition or improve accessibility for seniors, you may qualify for a tax deduction. This could include adding a wheelchair ramp, widening doorways, or modifying cabinet heights. Talk to your tax advisor to learn more about how you can deduct these medical-related improvements.
- Resale value improvements—Resale value improvements, or capital improvements, are updates that increase a home’s value. When it’s time to sell your home, these improvements can be tax-deductible. These improvements may include an addition, new bedrooms or bathrooms, or a finished basement.
Additional home-related deductions
Below are a few additional home-related deductions that may be available to you. Consult with your tax advisor to gain the most relevant tax advice and determine if you’re eligible for the following deductions.
- Mortgage deductions—The interest you paid on your mortgage may be tax-deductible. The amount will vary based on if you’re single, married and filing separately, or married and filing jointly. Speak with your tax advisor to determine if your mortgage interest is tax-deductible.
- Accidental losses deductions—According to IRS Publication 547, “Personal casualty and theft losses of an individual, sustained in a tax year beginning after 2017, are deductible only to the extent that they are attributable to a federally declared disaster.”
- Property taxes—Property taxes can be tax-deductible on annual tax returns.
- Moving expenses—If you’re making a job-related move, you’re in the position to write off moving-related expenses. You can write off the money you spend on storage, transportation, and shipping.
How to document home improvements for tax purposes
Staying organized is key to ensure you have the correct documentation when it’s time for tax preparation. You’ll need the paperwork detailing the completed work to qualify for any deductions. Make sure you itemize these improvements, erring on the side of being overly detailed rather than too vague and losing any tax deduction opportunities.
Storing these documents digitally through Dropbox or Google Drive will ensure that you don’t lose them and that they won’t be physically damaged. Simply scan and upload them to your cloud provider of choice. Keeping these documents for a minimum of three years is a general IRS guideline, but thanks to the convenience of cloud storage, you can keep these documents infinitely.
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