As a homeowner, you will most likely need to have work done to your home during the time you own it. It’s easy to be confused whether something is a repair or an improvement.
You might not think it matters, but it does for tax purposes. It could mean extra money in your pocket!
A repair and an improvement each have specific definitions by the IRS. Many improvements can be deducted or provide a tax credit. Repairs can neither be deducted by homeowners nor provide a tax credit.
That’s why you should know the difference between a repair and an improvement and understand any tax benefits (whether it’s a deductible or a credit) for certain home improvements. You’ll then be prepared to take advantage of these tax benefits with future tax returns and for when you sell your home.
Keep in mind that an investment property is treated differently than a personal residence by the IRS. Owners of investment properties can expense repairs in the year that they are paid, and improvements are considered capital expenditures.
Understand What is What
Let’s go over what is the difference between a “repair” and an “improvement” to a personal residence. We will also look at what is considered “home maintenance” compared to a “repair.”
- Repair — A repair is a modification that restores a home to its original state and/or value. It is returned to its previous good condition, but not improved upon.
Repairs can consist of a wide range of work, such as fixing a leaking toilet, patching holes in the wall, fixing an HVAC unit, replacing a roof shingle, or fixing your leaking gutters. All of these restore something to its original condition and do not increase the value of your home.
- Improvement — An improvement is any modification that increases the value of your home.
Improvements usually are more complex and more costly than repairs (but not always!), and they can change or improve your home in some way. Examples include replacing an entire HVAC system, replacing an entire roof, expanding your home with an addition, adding a new bathroom or bedroom, putting in energy-efficient windows or appliances, upgrading to wood floors from carpet. All of these add value to your home.
- Maintenance — Maintenance is considered work that is done to preserve functionality, not restore functionality like a repair. It helps prevent something from losing its function.
Maintenance doesn’t fix anything but rather it preserves its functionality. Examples include cleaning your gutters, having your HVAC system checked regularly, having your chimney serviced and cleaned, mowing the lawn, power washing siding, hiring a pest service.
Tax Benefits for Improvements
As an owner of a personal residence, you should make sure you are keeping track of any home improvements. Keep all receipts of your costs, including labor costs, since you will need a record of what you have done when you file your taxes.
Selling Your Home. Some tax-deductible improvements are only recognized when you sell your home and will be recognized on that year’s tax return.
Any improvements you do years before you sell should be thoroughly documented with receipts and records so that you can take advantage of these improvements once you sell.
The costs of your improvements are added to your tax basis for the home. For example, your adjusted basis includes the original purchase price and fees plus the addition of the costs of all your improvements through the years. When you sell your home, you’ll take the adjusted basis and compare that to your sales price to determine your profit for tax purposes.
Tax Credits for Energy-Efficient Improvements. Claim this credit in the same year that you complete certain energy-saving improvements.
If you plan to get windows or on demand water heaters that meet Energy Star requirements, or install solar panels, you could claim a credit on your taxes for that year.
Clarify Tax Deductions for Medical Care or Home Office Improvements. Find out if you qualify for tax deductions on certain home improvements for that year’s tax return.
If you plan to make improvements on your home for medical care such as exit ramps, adding a lift for stairs, or adding support bars in bathrooms, talk with a tax advisor to see if this work is eligible for a deduction.
Also, clarify if any work planned for a dedicated home office remodel is tax-deductible in that same year. The space needs to be used exclusively for your work and your home is the principal place of business.
Three Ways to Be Prepared
Don’t make the mistake of not taking advantage of the work you do on your home. When you spend money on your home, you also want to make sure you’re getting the tax benefits you deserve so you can recoup some costs.
Here’s how you can be prepared:
- Understand the difference between a repair and an improvement for tax purposes.
- Keep track of any improvements and their costs so you can receive tax benefits. Set up a system that works for you whether it’s an old school file with paper receipts, iCloud documents saved on your computer, or even a handy app on your phone.
- Get a trusted tax advisor to guide you when it comes to questions on any work done on your home.
I hope this article has been helpful to you. As always, consult with your own tax advisor for more information on your situation since tax laws can change each year. If you have any questions or need a recommendation, please reach to me.
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