As we all know, home improvements can be very expensive. Unfortunately, most home improvements aren't deductible the year you make them. But, even if they aren't currently deductible, they'll eventually have a tax benefit when you sell your home.
For tax purposes, a home improvement includes any work that:
Examples of home improvements include:
Can you deduct home improvements? If you use your home purely as your personal residence, the answer is "no." You can't deduct the cost of home improvements. These costs are nondeductible personal expenses.
But home improvements do have a tax benefit. They can help reduce the amount of taxes you have to pay if and when you sell your home at a profit.
The cost of home improvements are added to the tax basis of your home. "Basis" means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll get when you sell your home.
Home improvements are the most common way homeowners increase their basis.
But your home's basis doesn't include the cost of improvements that were later removed from the home. For example, if you installed a new chain-link fence 15 years ago and then replaced it with a redwood fence, the cost of the old fence is no longer part of your home's basis.
Although you can't deduct home improvements, it's possible in some situations to depreciate them. "Depreciation" means that you deduct the cost over several years—anywhere from three to 27.5 years.
To qualify to depreciate home improvement costs, you must use a portion of your home other than as a personal residence.
One way you can depreciate home improvement costs is to have a business and use a portion of the home as an office for the business. To qualify for the home office deduction you must have a legitimate business and use part of your home exclusively and regularly for the business.
If you qualify for this deduction, you can deduct 100% of the cost of improvements you make just to your home office. For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, you may depreciate the entire cost as a business expense.
Improvements that benefit your entire home are depreciable according to the percentage of home office use. For example, if you use 20% of your home as an office, you may depreciate 20% of the cost to upgrade your home heating and air conditioning system.
Another way to depreciate home improvement costs is to rent out a portion of your home. This enables you to depreciate the expense as a rental expense. This amount is deducted from the rental income you receive.
As with the home office deduction, improvements that benefit only the portion of the home being rented can be depreciated in full. Improvements that benefit the entire home can be depreciated according to the percentage of rental use of the home.
Repairs are things you do to your home that don't substantially add to its value, increase its useful life, or adapt it to new uses. For example, adding a new roof to your home is an improvement. But replacing a few loose shingles on your roof is a repair.
Repairs to your personal residence aren't tax deductible and they don't increase the basis in your home. In other words, they have no tax impact.
But, if you have a tax deductible home office, repairs are deductible. Likewise if you rent out all or part of your home. Repairs just to your home office or a room you rent full-time are 100% deductible. The cost of repairs that benefit your entire home—roof repairs, for example—must be allocated according to to the percentage of rental use of the home. For example, if you use 20% of your home as a home office and spend $1,000 to repair the roof, you can deduct $200.
If you have questions about whether you can write off home improvements or repairs, contact a tax lawyer.