Fixing Up Your Home: What It Means from a Tax Perspective

With spring in the air, many homeowners are fixing up their homes. Some projects may be minor; others are major. Homeowners do these activities to improve their living conditions and raise the value of their residences. These activities may or may not have a tax impact.

Repairs

Making ordinary repairs, such as painting the outside of a home or fixing leaky faucets, is essential for maintaining the home. Tax-wise, 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.

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 (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 (after taking into account the home sale exclusion if applicable).

Keep a record of and receipts for all capital improvements to help minimize gain on a future sale. Examples of improvements 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, and kitchen remodeling.

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 be subtracted from basis.

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:

• Solar and other renewable energy improvements: 30% of the cost. This credit applies to a principal residence as well as any other home.
• Non-business energy improvements, such as insulation, storm windows, furnaces, heaters, boilers, and central air conditioners: 10% of the cost up to a top credit of $500. The $500 is a lifetime limit for homeowners. Note: This credit expired at the end of 2014 but could be extended for 2015 as it has been in the past.

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.

Conclusion

Homes continue to be the biggest or one of the biggest assets owned by individuals. Taking care of the asset and upgrading it can add to wealth and may also offer tax benefits.