Home Improvement Tax Deductions
If you have made significant renovations or investments in real estate, it’s essential that you understand whether these projects qualify for tax deductions. In general, renovations that add value, extend the lifespan of the property or adapt it for new purposes are eligible for deductions.
improvements made in areas used exclusively for business, such as a home office, can be depreciated over time and written off through depreciation. Repair costs may not qualify as tax deductions.
Renovations
Renovating or adding on can potentially qualify for tax deductions, though only certain improvements qualify as tax breaks and the specifics can differ between rentals and homes. Most home improvement tax deductions are taken in the year the renovation is completed; however, there may be exceptions such as energy-saving improvements that only provide credits upon sale of property.
Documenting home improvements to maximize tax deductions requires gathering receipts, contracts and before-and-after pictures as proof. Consulting a real estate professional may help identify which improvements may increase resale value and how they might impact future property taxes. Furthermore, tax law is complex and ever changing, so consulting an experienced tax specialist during renovation planning stage could be useful to maximize savings and help determine which improvements qualify as deductions and impact future property taxes.
Repairs
Every landlord must perform regular repairs on their properties to keep them in top condition, from replacing faulty faucets or window panes to painting the property itself. While repairs and capital improvements can sometimes overlap, it’s essential that we distinguish between them to prevent tax blunders.
The Internal Revenue Service defines capital improvements as expenses that increase value or extend the lifespan of property, although their definition can sometimes be vague. To help sort through improvements from repairs, the IRS offers a framework based on final tangibles regulations which synthesizes case law with prior administrative rules to help identify expenses that qualify as capital improvements that can be deducted on tax returns.
Repairs that do not add value or extend the lifespan of a property aren’t deductible, but still count as maintenance work. Examples include replacing sagging gutters or patching driveway cement; repairs for broken windows or old carpeting may also qualify as maintenance activities.
Depreciation
Depreciation, as defined by the IRS, refers to any reduction in asset values over time. Property owners who rent out their properties can use depreciation as an income offset and reduce taxes when selling later. According to SF Gate, homeowners may also deduct certain tools used for maintenance such as lawnmowers or weed eaters from depreciation deductions.
Capital improvements, as defined by the IRS, qualify for tax deductions over their useful lives of three to 27.5 years. While eligible repairs restore assets back to their original state, capital improvements add value by prolonging or adapting it for different uses.
Homeowners claiming expenses must keep records of their work by keeping receipts, purchase orders and cancelled checks as evidence of materials and labor costs. To claim these expenses with the IRS, homeowners should itemize these costs and claim depreciation deductions against base cost starting the year an improvement is placed into service.
Medical expenses
Rules regarding home improvement projects claimed as medical deductions can be complicated, but in general work related to caring for someone with chronic illnesses may be fully tax-deductible. This could include building ramps, widening doorways or installing support bars as well as breast pumps or nursing supplies used during lactation as well as medically necessary equipment.
Nolo warns that any home improvements undertaken solely for resale purposes won’t qualify as tax deductions; rather, their expenses will be recovered through depreciation.
Some energy-saving home upgrades qualify for tax credits the year they are installed, including installing energy efficient windows, doors, skylights and insulation as well as air-source heat pumps, hot water heaters and circulating fans. You may even qualify for a deduction when switching over to solar power!
