Your home is one of the largest investments you will ever make. Buying a home is an exciting thing, but maintaining and repairing the home can be a costly endeavor. So, any aspect that you can save on this big investment is worth looking into.
As many people are spending much more time at their homes, home improvements might just be the next quarantine activity. As a homeowner, you are likely wondering: Are there any tax breaks for all the money I am spending to improve my home? Well, the answer to this question depends on the type of improvements you are making and how you’ve archived your home-improvement related expenses.
The taxability of the work you are putting into your house is determined by what type of work you are doing to your home: home repairs or home improvements. You might be thinking— “what is the difference?” Well, this article will expand on the nuanced difference in the tax code.
Home Improvements – TAX BENEFIT
Home Repairs – NO TAX BENEFIT
What is classified as a Home Improvement?
Under the tax code, you can add the cost of a capital improvement to the tax basis of your home when you sell it. The basis is how much the house cost you when you initially purchased it and is used as a measure to subtract from your sale price to determine the amount of profit you must record on your taxable income. By adding the cost of a capital improvement, you have made to your home lowers the amount you list as taxable income.
What is a capital improvement? While there is not a clearly delineated list of what classifies as a capital improvement for tax purposes, it is something that adds value to your home, prolongs its life, or adapts it to make the use new. We have learned that things like adding a room to your house, adding a swimming pool, a new roof, or installing a central air conditioning system can qualify as capital improvements, which allows you to add the cost of the improvements to your basis when you sell the home. Additionally, they include things like adding an extra water heater, a home security system, or storm windows to your house.
What is classified as a Home Repair?
Alternatively, you cannot add the cost of home repairs to your basis when you sell your home. Home repairs are considered more of the maintenance type tasks that you have to do as a homeowner just to maintain your dwelling. These are things like fixing your toilet, painting a room, replacing insulation panels, etc.
While under old tax law, it was crucial to document every penny you spent on home improvements because each penny, if categorized as a capital improvement, could be added to your basis when you sell the home. Now a days, now that profits from a home sale generally are tax free up to $500,000 for married couples, it is less of a worry to document each expense. Now you can save on taxes when you sell your home if you have lived in the home for two of the last five years. The tax benefit is that you are not taxed on the profit from the sale of your home up to $250,000 if single, and $500,000 if filing as a married couple.
Also, if you are considering making home improvements, consider looking into energy efficient home improvement as there are also federal tax incentives and possibly state tax breaks for doing so.
There are many resources and specialists out there, and if you need help finding those resources please let us know.