Can home improvements be deducted from capital gains?

Home Improvement Deduction from Home Sale Benefit If you make substantial physical improvements to your home, even if you made them years before you began actively preparing your home for sale, you can add the cost to your tax base. This will reduce the amount of any taxable profit from the sale. The basic answer is yes. The home fit-out costs that you, as a homeowner, incur to sell your home will reduce any capital gains taxes you will have to pay on the proceeds earned from the sale.

These expenses can reduce capital gains taxes in two different ways. All capital improvements to your home are tax-deductible. You cannot claim the deduction until you sell it when the cost of additions and other improvements is added to your property's cost base. The IRS defines a capital improvement as a home improvement that adds market value to a home, extends its useful life or adapts it to new uses.

Minor repairs and maintenance work, such as changing door locks, repairing a leak, or fixing a broken window, do not qualify as capital improvements. Capital improvements increase the value of your home and improve your property, and can reduce the amount of tax you owe if you decide to sell. A capital improvement is any permanent addition or alteration that increases the value of your home or adapts it to a different use. Some examples of improvements that increase its base include wall-to-wall carpeting, central air systems, built-in appliances, a new roof, and storm doors and windows.

The following table describes what percentage of the cost of home improvement qualifies based on the year in which the improvements occurred. When you make a capital improvement, the expense amount is added to your housing cost base—essentially what you paid for housing plus the cost of any capital improvement. Which home improvements produce the greatest tax benefit will depend on your personal tax situation. There can be a very thin line between a capital improvement and a repair, says Erik Lammert, a former tax research specialist with the National Association of Tax Professionals.

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. Because capital improvements increase the value of your home, they can help you save money on taxes if you make a profit selling your home by increasing your property base. What you may not know is that you may be eligible for capital improvement tax breaks on your home when you sell. The one-year rule and remodeling project standard help distinguish improvements from repairs that every homeowner must perform in the course of normal home maintenance.

For the most part, if a project is large enough to add value to your home or improve its use, you can generally consider it a capital improvement. Be sure to keep a good record showing that the painting was done at the same time as, and as part of, the overall home remodeling or improvement project, to show the IRS if you decide to do an audit. All repairs, additions and improvements to a property used in connection with a business, or one that produces income, such as a rent, are tax-deductible, regardless of whether they are capital improvements.

Alejandro Neidenbach
Alejandro Neidenbach

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