Table of Contents
- 1 Are Home Improvements Tax Deductible?
- 2 The Difference Between Improvements and Repairs
- 3 Capital Home Improvements Qualify
- 4 What About Energy Saving Home Improvements?
- 5 What about Home Repairs?
- 6 Tracking is Less Critical than Before
- 7 Saving on Capital Gains When You Sell
- 8 How to Stay Prepared
- 9 TurboTax Can Help You Claim the Home Improvement Tax Deduction
- 10 How to File Taxes Online in 3 Simple Steps With TurboTax
Are Home Improvements Tax Deductible?
Whenever you make a home improvement, such as replacing the windows or installing a brand-new HVAC system, you may be able to use those investments to claim a home improvement tax deduction.
This tax deduction cannot be used when you spend the money, but they can be used to reduce your taxes in the year you decide to sell your house.
Despite this being an incredibly easy way of reducing your capital gains taxes, so many taxpayers fail to keep accurate records, and many are simply unaware that they can claim a home improvement tax deduction when they sell their home.
The Difference Between Improvements and Repairs
For tax purposes, there is a difference between the cost of improvements and the cost of repairs. It is important to know the difference between the two to avoid making any mistakes when it comes to reducing your exposure to capital gains taxes.
Capital Home Improvements Qualify
All capital improvements may be added to the tax basis of a property. Your tax basis is the amount you paid for the home plus any improvements. This is subtracted from the final sales price, with the remaining amount being subject to capital gains taxes.
The definition of a capital improvement is something that increases the home’s value, extends its lifespan, or adapts it to a new use.
There is no comprehensive list as to what counts as a capital improvement, but common improvements like a new roof, a new HVAC system, an extension, or a swimming pool will always qualify.
Capital improvements do not have to be expensive. Other types of capital improvements include storm windows, an additional water heater, an intercom, and home security systems.
What About Energy Saving Home Improvements?
You should also know home improvements designed to save energy may yield tax credits in the year you make them. Federal and state governments have a variety of programs aimed to encourage people to make energy-saving home improvements through one-time tax credits.
What about Home Repairs?
The cost of any repairs cannot be added to your tax basis. For example, you will be unable to add a repaired windowpane, painting a room, or fixing a gutter onto your tax basis. These are necessary acts of maintenance.
Tracking is Less Critical than Before
In the past, homeowners had to keep every single receipt for a home improvement to qualify. Every single cent was added to the basis to reduce capital gains taxes. However, the situation has changed, and most owners will find that profits on sales of their homes are largely tax-free anyway.
Either way, it is still good practice to keep the receipts because for high-income taxpayers and real estate investors adding home improvements can have a big impact on the tax basis.
Saving on Capital Gains When You Sell
If you have lived in a home for two of the past five years before the sale, the first $250,000 of profit is tax-free if you happen to be a single taxpayer. For married couples filing jointly, the tax-free profit amount is $500,000.
To determine the size of the profit, your goal should be to increase the basis as much as possible. Calculate everything involved in the purchase of the house. This does not only include the purchase price, but any additional fees involved in buying the home.
Add in the total cost of every improvement you have made over the years. This is known as the adjusted basis of a home.
Compare the difference between the adjusted basis and the sale price of the property. That number is what you will pay capital gains taxes on.
Be aware that your exposure only begins after your exemption, as described above.
Taxpayers should also be aware that losses on sales of personal residences are not tax deductible.
How to Stay Prepared
Keeping track of all your home improvements can be tough, especially if you have owned your home for a significant period.
Make a special folder designed for the receipts and records relevant to your property. If you inherited the property, you should also keep the records of your parents and grandparents.
Finally, if you happen to operate a business from home, or you rent out a room to a third party, you may be able to write off part of the adjusted basis through the rules on depreciation.
If you opt to factor in depreciation, you will not be able to exclude the depreciation amount you took under the gain exclusion tax break. However, any repairs you made to the portion of the home used for business or rental purposes may be tax deductible.
TurboTax Can Help You Claim the Home Improvement Tax Deduction
Don’t worry about how to claim the solar tax credit. TurboTax will ask you simple questions and help you claim the home improvement tax deductions and credits you’re eligible for based on your answers.
If you have questions you can connect live via one-way video to a TurboTax tax expert or CPA. TurboTax Live tax experts and CPAs are available in English and Spanish and can also review, sign, and file your tax return.