Tax Ramifications of Fixing Up Your Home

If you’re a homeowner, it’s likely you continually work on your home. Some projects may be minor and low cost, while others are major and expensive. All these projects improve your living conditions and can also add to the value of your home. The work on your home may or may not have tax consequences. Here are some ramifications to your projects.

Capital improvements

Except for certain energy improvements discussed later, adding a room, replacing the roof, or installing new appliances does not generate any immediate tax write off—a deduction or credit. However, the cost of these and other capital improvements is added to the basis of the home. This basis is used for determining gain or loss on the sale of the home. The higher the basis, the lower the taxable gain. With the price of homes rising and the home sale exclusion–$250,000 for singles and $500,000 for joint filers who qualify—staying the same (it’s not adjusted for inflation), a sale may produce capital gains, and a boost in basis will minimize the tax cost on a sale.

Keep a record of and receipts for all capital improvements to help minimize gain on a future sale. Examples of improvements that increase basis include: additions (e.g., bathroom, bedroom, porch, deck), landscaping (e.g., adding trees and scrubs, fencing, sprinkler system), swimming pool, upgrading wiring and plumbing, security systems and satellite dishes, new appliances (e.g., refrigerators, washers, dryers), flooring, carpeting, kitchen remodeling. However, the value of any labor that you may put into a capital improvement (so-called “sweat equity”) cannot be added to your home’s tax basis.

Note: If a capital improvement is no longer part of the home, its cost must be removed from basis. For example, if you added carpeting years ago but now replace it with hardwood floors, the cost of the carpeting must now be subtracted from basis.

Repairs

Making ordinary repairs, such as painting the outside of a home or fixing leaky faucets, is essential for maintaining the home. Tax-wise, however, such costs are not deductible and do not have any impact on the basis of the home. This is so regardless of the cost of the repairs or maintenance.

Note: If you claim a home office deduction and figure the write off using actual expenses, then a portion of repairs related to the office space becomes part of the home office deduction.

Medical improvements

Home improvements related to medical care may be deductible as medical expense if you itemize deductions. The cost of the improvement is reduced by the increase in the value of your property; the difference is a deductible medical expense. For example, if a doctor prescribes swimming as treatment for a condition, the cost of installing a pool is a deductible medical expense to the extent it does not increase the value of the home. If the value of your property isn’t increased by the improvement, the entire cost is a qualified medical expense.

Certain improvements made to accommodate a home for a disabling condition of the homeowner, spouse or dependent are fully deductible. Examples of such improvements include:

• Constructing entrance or exit ramps for the home.
• Widening doorways at entrances or exits to the home.
• Widening or otherwise modifying hallways and interior doorways.
• Installing railings, support bars, or other modifications to bathrooms.
• Lowering or modifying kitchen cabinets and equipment.
• Moving or modifying electrical outlets and fixtures.
• Installing porch lifts and other forms of lifts (but elevators generally add value to the house so that the deductible amount is reduced, as explained above).
• Modifying fire alarms, smoke detectors, and other warning systems.
• Modifying stairways.
• Adding handrails or grab bars anywhere (whether or not in bathrooms).
• Modifying hardware on doors.
• Modifying areas in front of entrance and exit doorways.
• Grading the ground to provide access to the residence.

Energy-saving improvements

Making energy-saving improvements cuts down on utility usage to save money and help the environment. There can also be tax savings. Federal tax credits for certain energy improvements reduce out-of-pocket costs for making these improvements. The credits for 2023 through 2032 are:

• Solar and other renewable energy improvements: 30% of the cost. The residential clean energy property credit applies to a principal residence as well as any other home.
• Energy efficient home improvements: 30% of the cost up to a top annual credit of $1,500 (although certain caps apply to some improvements). The credit applies to such improvements as insulation materials; exterior doors, windows, and skylights; water heaters, furnaces, boilers, and heat pumps; central air conditioners; and biomass stoves and boilers. It also applies to home energy audits.

There may also be tax incentives on the state tax level for energy improvements to a home. These incentives may come in the form of property tax reductions, sales tax exemptions, and income tax credits. Check DSIRE for details about credits in your state.

Note: The basis of the home for purposes of determining a gain or loss on a sale is reduced by any tax credits claimed for energy improvements.

Conclusion

When making home improvements, tax results may not be a major consideration; improved living conditions and home value may be more important. But don’t ignore the tax impact of making improvements to your home.