Tax differences between home repairs & home improvements
Wednesday, September 03, 2014
This post reviewed and some links updated August 16, 2019.
Apparently the work gods think I need time off this week. Yesterday I lost a couple of hours taking care of family business. Today our house is intruding on office time.
As I type, a plumber is working on my kitchen sink faucet. I'm lurking in the adjacent den, hoping that it's a minor repair. I'm also hoping that he'll be able to finish the job today.
Tax-saving home costs: My routine residential upkeep situation prompts a tax question I get quite often: What work around my house can I write off on my taxes?
The answer for most homeowners is not much.
Most of the work done on most houses falls into the repair or maintenance category. And under the Internal Revenue Code, repairs, renovations and general maintenance of your personal residence are nondeductible personal expenditures.
For work on a personal piece of real estate to have any tax value, it must add to the property's value or prolong its life. These are classified as home improvements.
You and I likely will argue that a working kitchen faucet does indeed add value to our homes, but the Internal Revenue Service is unpersuaded in this area.
Instead, the federal tax man says general upkeep tasks like my faucet repair simply keep or return a home to its original good condition, rather than qualify as tax-reducing improvements to the residence.
Tax-saving capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses. So unless I get a new solid gold faucet, my repair is just that, a nontax required repair.
Basis basics: The IRS lists qualifying home improvements in Publication 523. This document deals with selling your home and the repair vs. improvement issues that come into play at that point.
Basically, while repairs will help you sell your home, it's the improvements that will add to the residence's basis. And it is basis — the value of your property including any improvements you've made — that is crucial in determining if you owe any tax on the sale proceeds.
You subtract your home's basis from the sale price to arrive at your sale profit.
If your profit is $250,000 or less for a single seller or $500,000 or less for a married couple filing jointly, you don't owe any tax on the home sale profit.
That's one home-related tax break that wasn't changed by the Tax Cuts and Jobs Act (TCJA) of 2017.
And most folks still won't have to worry. Their profit will fall under the threshold so they have no tax bill.
But if you bought your home many years ago for a low price and the housing market is hot in your area, you could flirt with the $250,000/$500,000 cap. A bigger home basis will help keep you under it and keep you from owing the IRS.
Here are some examples of how basis helps, in simplified, illustrative purposes only.
You, a single homeowner, purchased your residence for $75,000. You sold it 10 years later for $375,000. Your profit is $300,000; that's $375,000 sales price minus your basis of $75,000. You owe capital gains tax on $50,000.
But if you made at least $50,000 in capital improvements to the property, you increased your home's basis to $125,000. That means your profit is $250,000 and that's excludable from taxation.
Again, there are many factors that add to a residence's basis. They are discussed in Publication 523. But this gives you an idea of what you need to consider.
Acceptable home improvements: So what type of work does the IRS accept as a basis-increasing home improvement? The table below from Publication 523 has some suggestions:
If you make any of these improvements, hang onto the paperwork and receipts so you can add the amounts to your home's basis.
Pay attention to situations: Of course, we are talking taxes, so sometimes the projects can get a little fuzzy.
For example, replacing a few shingles on one area of your roof is a repair. Replacing the whole roof is a capital home improvement. That one cracked window pane? A repair. A whole new window? An improvement.
And, says the IRS, repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering are repairs, not improvements.
Also note that some of your home improvements, although totally tax valid, might not count. This is the case where you made an improvement, but that upgrade is no longer part of your home.
This could be the case, says the IRS, if you installed wall-to-wall carpeting in your home 15 years ago, but this year replaced that floor covering with new carpeting or hardwood floors. The older carpeting costs do not count because that flooring is no longer part of your home.
There is one exception, but it's not one any of us want to use. If your home is damaged in a fire or natural disaster, everything you do — even things that normally would be considered simply repairs — to return your home to its pre-loss condition counts as a capital improvement.
Note, however, that when it comes to claiming disaster losses, the TCJA did change the rules. You only get this tax relief if your losses were from a presidentially declared major disaster.
Also note that these rules about improvements vs. repairs apply to costs associated with your personal residence. There are some tax differences when it comes to work on rental and investment real estate.
You can read more about rental property tax issues in Publication 527. I also recommend you talk with a tax expert who's experienced in this area.
No tax break for me: For me, however, it's clear that my faucet work is a repair, even though it's going to end up improving, at least from my perspective, our kitchen.
And as I feared, the job is going to cost me more than I had hoped and take longer than just today.
No simple tightening or loosening of a screw here or replacing a hose there. The plumber says we need a new fixture. So I'm off to the hardware store to look at faucets, after which I'll have him back to install it. (You can see the results in this post.)
But I'll be hanging onto the receipts and documentation anyway, for warranty if not tax purposes.
You also might find these items of interest:
Thank you for this information! It is very useful.
Posted by: Kayla Sanchez | Monday, August 10, 2015 at 06:14 AM
Excellent article with great content. I sell real estate and this is a great article for those who have recently purchased or who are thinking of selling.
Posted by: Ann Wilkins | Friday, April 17, 2015 at 10:57 AM
Thank you for sharing this very informative post. I was just searching about tax differences between home repairs and improvements until I stumbled upon your post. I've really learned a lot! Thanks again and happy new year!
Posted by: Carl Cantrell | Wednesday, December 31, 2014 at 09:26 PM
Thank you for this, Kay. If enough of my tax clients read it, I will not need to repeat a thousand times every year that an expenditure adding to the life or value of a property is not a "repair."
Posted by: Brian Huber | Saturday, September 06, 2014 at 10:54 AM