If you own a home, odds are at some point you’ll perform home improvements. A common question when considering updates is, “Are home improvements tax deductible?" The answer depends on the type of improvement made and whether it’s performed on your personal home or a rental property.
Adjusting the Cost Basis of Your Home
Most home improvements are not tax deductible, but can be used to offset taxable gain on the sale of your home. The IRS defines an improvement as something that prolongs the life of your home, increases its value, or adapts your home to new uses. Finishing your basement, upgrading your kitchen, or fencing your yard generally qualify as home improvements. The costs of these modifications, including materials, labor, and any expenses such as survey or permit fees, are added to the cost basis of your home.
Repairs to your home are not eligible to be included in your cost basis, and there is no tax deduction for home repairs. Repairs keep your home in normal condition and do not add value to your home or prolong its life. Repainting your home’s interior or exterior, fixing the roof, or replacing broken windows are considered home repairs. Painting that is part of an addition or substantial renovation, however, would qualify as a home improvement.
Energy Efficiency and Green Credits
Some home improvements qualify for tax credits, which are generally more advantageous than deductions. A deduction reduces your taxable income, while a credit is subtracted from your tax due. Certain energy efficient home improvements made between January 1, 2009 and December 31, 2010 are eligible for a credit of 30% of the cost, up to $1,500 total. Qualified improvements include doors, windows, roofs, heating, air conditioning, water heaters, insulation, and biomass stoves. An additional 30% credit is available for certain green improvements such as qualified solar panels, solar water heaters, wind turbines, and geothermic heat pumps. There is no cap on this credit, and it is available for property put into use through December 31, 2010.
Improvements to Rental Homes
The rules are different for rental homes, although the definitions of improvements and repairs are the same. You can take a home repair tax deduction for a rental home in the year you pay for the repair, as a rental expense. Improvements to a rental home are not deductible; instead, you must depreciate the cost of improvements over the life of the property. Any improvement costs that have not been depreciated when you sell the rental home are added to its cost basis.
In the simplest sense of the term, home improvements are not tax deductible. They do provide some tax benefits in certain cases, however. If you make improvements to your home, be sure to keep your receipts for as long as you own the home, so that you can correctly utilize your home improvement costs to offset any gain on the sale of your home.
The information provided in this article is intended as a general overview of tax benefits for home improvements, and not as tax advice. Discuss your specific situation with your CPA or tax preparer before claiming home improvement tax deductions or credits.
- IRS Publication 530: Tax Information for Homeowners - http://www.irs.gov/publications/p530/ar02.html#en_US_publink100011949
- IRS: Energy Incentives for Individuals in the American Recovery and Reinvestment Act -http://www.irs.gov/newsroom/article/0,,id=206875,00.html
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