Can home improvements offset capital gains?

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. You add the cost of capital improvements to your home tax base. Adding wall-to-wall carpeting or replacing the carpet in your home can be considered a capital improvement. However, it's important to note that a previous replacement won't be added to your base.

Only the replacement in your home when you sell can be considered a capital improvement. They can tell you which home improvement projects produce the highest return so you don't waste your money. 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. Generally speaking, home improvements aren't tax-deductible, but there are some tax-saving opportunities worth considering.

However, if you replace them as part of a larger project, such as improving energy efficiency in the home, these repairs may qualify as a capital improvement. What you may not know is that you may be eligible for capital improvement tax breaks on your home when you sell. If repairs are done as part of an overall home improvement project, they may be included in the cost of the upgrade. IRS Publication 523, Selling Your Home, provides a list of the types of improvements that can be added to the database.

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. In order for a capital improvement to be considered and qualify for a tax exemption, the IRS also states that any change must have a life expectancy of more than one year. While you may consider all the work you do at home to be an improvement, the IRS sees things differently. If you sold your home in the future, you could offset part of the income with a higher base that comes from remodeling.

But thankfully, the government allows you to adjust your cost base by adding the money you've spent on home improvements.

Alejandro Neidenbach
Alejandro Neidenbach

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