Updated Oct 11, 2022
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.
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:
Some examples of home repairs include:
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.
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.
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.
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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