Do you wonder about the difference between home improvements and home repairs. There is often confusion on whether home improvements and repairs are tax deductible. Is a new roof tax deductible? What about an addition?
Surprisingly, in most cases, it simply doesn’t matter unless your house increases dramatically in value during the time you own it.
Improvements vs. Repairs
Whenever money is spent on your home, it will generally be either an improvement or a repair. An improvement is anything that adds additional value to your home or increases its lifespan. There’s not a specific list of improvements.
Things like an addition to your home or a new furnace are certainly improvements. Adding an alarm system would count, too. Other common improvements would be re-plumbing your house, adding an in-ground pool, or making your home handicap accessible.
Home improvements can impact your tax situation, but only at the time you sell your home. Improvements are included in the tax basis of your home. A $20,000 swimming pool would decrease the profit you realize upon the sale of your home by $20,000.
Repairs don’t provide the same benefit. Repairs would include things like painting a room or fixing a leaky sink.
Does this tax advantage really matter?
For most people, it doesn’t. Under the current tax law, you don’t have to pay any taxes on the profit generated from the sale of your home, for up to $250,000 for singles and $500,000 for married couples filing jointly.
So, the tax benefit from home improvements is only relevant if you receive profit beyond these thresholds. It could even be argued that keeping records of your improvements is a waste of time. But maintaining good records is still a prudent idea.
Keep all of your home improvement and repair receipts. You don’t know what the housing market will do in the future. Keeping these records could save you hundreds of thousands of dollars in some circumstances.
When you sell your house and determine the amount of profit, you can subtract the original sales price and the cost of your home improvements. Unless you’ve made a lot of improvements or the market has gone through the roof, you’re unlikely to see any tax benefits.
Some home improvements actually are tax deductible, such as energy-related home improvements or any losses you’ve suffered due to theft, act of nature, or accident. In the case of the latter, only the amount not covered by your insurance is tax-deductible.
If you rent out part of your home or qualify for a home office deduction, you have some additional tax advantages. Any repairs specific to the parts of your home used for these purposes are tax-deductible.
Any whole house repairs can be partially deducted. For example, if your home office accounts for 10% of your total square footage, you can deduct 10% of the cost of a new a/c unit from your taxes. Similar rules are followed if you rent out part of your home.
Improvements can be tax-deductible, but only when you sell your home. Repairs are only tax-deductible if you rent part of your home or have a home office that qualifies as a tax deduction.
Otherwise, tax deductions only exist if you realize more than $250,000 of profit when selling your home. Remember that amount increases to $500,000 if you’re married filing jointly. If you have any additional questions, be sure to contact a tax professional. For most of us, there won’t be a tax deduction from any home improvements or home repairs.