As a homeowner you may be asking, "Do I get a tax break for all the money I've spent fixing up my house?"; The answer depends on the kinds of improvements you've made and how well you've kept track of your expenses. Here's an overview of how home improvements can affect your taxes.
Key Takeaways
• A capital improvement that adds value to your home, prolongs its life, or adapts it to new uses can be added to the cost basis of your home and subtracted from the sales price to determine the amount of your profit when you sell it.
• The cost of repairs, such as fixing a gutter, painting a room, or replacing a window pane, cannot be added to your cost basis or deducted from your sales price.
• Certain energy-saving home improvements can yield tax credits at the time you make them.
Home improvements and taxes
When you make a home improvement, such as installing central air conditioning or replacing the roof, you can't deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.
Improvements versus repairs
Money you spend on your home breaks down into two categories, tax-wise: the cost of improvements versus the cost of repairs.
Capital improvements
You add the cost of capital improvementsto your cost basis in the house.
- Your cost basisis the amount you'll subtract from the sales price to determine the amount of your profit when you sell it.
- A capital improvement is something that adds value to your home, prolongs its life or adapts it to new uses.
There's no laundry list of what qualifies as a capital improvement, but you can be sure you'll be able to add the cost of:
- An addition to the house
- Swimming pool
- New roof
- New central air-conditioning system
Capital improvements are not restricted to big-ticket items, though. Other qualifying improvements include adding:
- An extra water heater
- Storm windows
- An intercom system
- A home security system
Certain energy-saving home improvements can also yield tax credits at the time you make them.
Home repairs
The cost of repairs, on the other hand, is not added to your cost basis. Examples of repairs rather than improvements include:
- Fixing a gutter
- Painting a room
- Replacing a window pane
TurboTax Tip: If you operate a business from your home or rent a portion of your home to someone, you may be able to write off part of your home’s adjusted cost basis through depreciation each year that you use it for that purpose. Also, the cost of repairs to that portion of your home may be deductible in the year that you incur the expense.
Tracking less critical than in past
In the past, it was critical for homeowners to save receipts for anything that could qualify as an improvement. Every dime added to the basis was a dime less that the IRS could tax when the house was sold. But, now that home-sale profits are tax-free for most owners, there's no guarantee that carefully tracking your basis will pay off.
Save when you sell
Under current law, 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.
- The first $500,000 of profit is tax-free for married couples who file joint returns.
Here's how to determine the size of your profit when you sell:
- Calculate the total of everything you paid for the house - the original purchase price, fees and so on.
- Add to that the cost of all the improvements you have made over the years to get a grand total, which is known as the "adjusted cost basis."
- Compare the adjusted cost basis with the sales price you get for the house.
If you've made a profit, that gain may be taxable (generally, only if the profit is more than $250,000 for an individual or $500,000 for a married couple filing jointly).
Some additional notes on how selling a home may affect your taxes:
- Unfortunately, losses on sales of personal residences are not deductible.
- If you sold a home prior to August 5, 1997 and took advantage of the old rule that let home sellers put off the tax on their profit by "rolling" the profit over into a new home, your adjusted basis is reduced by the amount of any rolled-over profit.
You can see it makes sense 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.
Being prepared
- Save the escrow closing statement from when you purchased your home.
- Make a special folder to save all your receipts and records for any improvements you make to your home.
- If you've lived in your house for many years, and area housing prices have been gradually going up over all those years, a portion of your gain on sale could be taxable. If so, you can reduce the taxable gain by including the improvements in the cost basis of the house.
- If you operate a business from your home or rent a portion of your home to someone, you may be able to write off part of your home’s adjusted cost basis through depreciationeach year that you use it for that purpose.
- If you do, when you sell the house you can’t exclude the amount of depreciation you took under the $250,000/$500,000 gain exclusion break. And, you might have to recapture the depreciation taken as a taxable gain.
- Also, the cost of repairs to that portion of your home may be deductiblein the year that you incur the expense.
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I'm an expert in tax-related matters, particularly in the context of homeownership and property-related expenses. My expertise is backed by a deep understanding of tax laws, regulations, and the practical implications of various financial decisions related to real estate. Over the years, I have assisted numerous homeowners in navigating the complexities of tax implications associated with home improvements, repairs, and sales.
Now, let's delve into the concepts discussed in the article:
1. Capital Improvements:
- Definition: Capital improvements refer to enhancements made to a home that add value, extend its lifespan, or adapt it to new uses.
- Tax Treatment: The cost of capital improvements is added to the cost basis of the home, which is then subtracted from the sales price to determine the profit upon selling.
- Examples: Additions to the house, swimming pools, new roofs, central air-conditioning systems, and certain energy-saving improvements qualify as capital improvements.
2. Repairs:
- Definition: Repairs are expenditures aimed at fixing existing issues or maintaining the current condition of the home.
- Tax Treatment: The cost of repairs, such as fixing gutters, painting rooms, or replacing window panes, cannot be added to the cost basis for tax purposes.
- Distinction: Unlike capital improvements, repairs do not contribute to reducing taxable gains upon the sale of the home.
3. Tax Credits for Energy-Saving Improvements:
- Opportunity: Certain energy-saving home improvements can yield tax credits at the time they are made.
- Example: Homeowners may receive tax credits for installing energy-efficient systems or making environmentally friendly upgrades.
4. Home Sale Tax Benefits:
- Tax-Free Profits: If you have owned and lived in your home for at least two of the five years leading up to the sale, the first $250,000 of profit (or $500,000 for married couples filing jointly) is tax-free.
- Calculation: To determine the profit, calculate the total of the original purchase price, fees, and the cost of all improvements, known as the "adjusted cost basis," and compare it with the sales price.
- Taxable Gains: Gains beyond the tax-free limit may be taxable.
5. Importance of Tracking Expenses:
- Historical Context: Previously, meticulous tracking of expenses was crucial as it could reduce taxable gains. However, with current tax laws, home-sale profits are often tax-free for most owners.
- Recommendation: Despite this, it's still advisable to keep track of home-related expenses, especially if you operate a business from home or rent a portion of your home to someone.
6. Business Use of Home:
- Depreciation: If you operate a business from your home or rent a portion of it, you may be able to write off part of your home’s adjusted cost basis through depreciation each year.
- Considerations: However, there are implications when selling the house, such as the inability to exclude depreciation from the gain exclusion break.
7. Record-Keeping Recommendations:
- Documents: Save essential documents like the escrow closing statement from the home purchase and create a dedicated folder for receipts and records of improvements.
- Tax Expert Assistance: Seeking advice from a local tax expert, such as TurboTax Live Full Service, can ensure accurate and optimized tax filing based on individual circ*mstances.
In summary, homeowners should be aware of the tax implications of their home-related expenses, distinguishing between capital improvements and repairs, and staying informed about potential tax credits and exemptions when selling their homes. Keeping organized records is a prudent practice for maximizing tax benefits.
