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Home Improvements & Your Taxes: What You Should Know

July 13, 2023

Have you been working on your home? Wondering if you get any kind of tax breaks for improvements such as replacing your roof and installing central air? We share insights here.

Attention homeowners…working on a home improvement? While you cannot deduct the cost of home improvements the year you spend the money, you may be able to reduce your taxes when it comes time to sell your home in the future. We shed light on tax deductible home improvements here.

First things first—what is the difference between repairs and improvements?

Tax-wise, it is important to make the distinction between home improvements and home repairs. Improvements are enhancements to your home that add value, prolong the home’s life, or adapt the home to new uses. Repairs, on the other hand, keeps a property in efficient working condition.

Examples of improvements include:

  • New roof
  • An addition to the house
  • Swimming pool
  • New central air-conditioning system
  • An extra water heater
  • Storm windows
  • A home security system

Examples of repairs include:

  • Replacing a windowpane
  • Fixing a gutter
  • Painting a room
  • Patching up cracks in a floor
  • Repairing a leak in the roof

How do taxes factor in?

Most home improvements are only tax deductible if you sell your property. When you sell your home, your cost basis is the amount you will subtract from the sales price to determine your profit. Whenever you make a capital improvement to your home, you then add the cost of the improvement to your cost basis. Every penny added to the cost basis is a penny less that the IRS can tax when you sell your house.

When you sell, if you have owned and lived in the home for at least two of the five years leading up to the sale, the first $250,000 of profit on the sale of a principal residence is tax-free for single filers. ($500,000 for joint filers).

What deductions can be claimed without selling your home?

  • Energy efficient improvements- Effective on January 1, 2023, the energy efficient home improvement credit is increasing with an annual credit up to $1,200. The amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, including qualified energy efficiency improvements installed during the year, residential energy property expenditures during the year, and home energy audits during the year.
  • Home office improvements- Check out our blog, Home Office Deductions- A New Simplified Calculation
  • If you rent a portion of your home to someone or operate a business from your home you may have the opportunity to write off part of your home’s adjusted cost basis through depreciation
  • Keep in mind that you cannot exclude the amount of depreciation you took under the $250,000/$500,000 gain exclusion break when you sell the house.
  • The repair costs to that portion of your home may be deductible in the year that you incur the expense.

Record retention tips

It is wise to keep track of whatever you spend to fix up, expand or improve your house, so you can reduce or avoid taxes when you sell.

Bear in mind that home improvement deductions can be taken only if you itemize tax deductions rather than relying on the standard tax deduction.

Questions about taxes and home improvements? We can help. Contact us.

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