Capital Improvements and Taxes
A capital improvement is something that adds value to a home, extends its useful life, or adapts it for a new use. In some cases, these improvements can lower the tax you pay on the proceeds you get from a home sale. First, though, it’s important to understand which types of improvements qualify as capital improvements. According to the IRS, the following projects are examples of capital improvements:
Systems: Heating, central air, furnace, ducts, central humidifier, central vacuum, air and water filtration, wiring, security, or lawn sprinklersAdditions: Bedroom, bathroom, deck, garage, porch, or patioLawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, or swimming poolExterior: Storm windows/door, new roof or siding, or satellite dishInsulation: Attic, walls, floors, pipes, or ductsPlumbing: Septic system, water heater, soft water system, or filtration systemInterior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpet, or fireplace
Capital improvements add to the value of your home, they can help you save money on taxes if you make a profit selling your home by increasing the basis of your property. The basis represents the amount of capital investment you’ve invested in a property. If you sell your home and make a profit, you earn a capital gain that equates to your profit on the sale. In general, you won’t need to report a capital gain on the sale of your home during tax season if you meet certain primary residence and ownership requirements, and the profit form the sale is less than $250,000 (or $500,000 for married taxpayers filing jointly).
Capital Improvements vs. Repairs
While making repairs to a property may feel like a capital improvement to the owner who spent time and money on them, they won’t necessarily count as capital improvements to the IRS. Mark Steber, senior vice president at tax-prep company Jackson Hewitt, told The Balance in an email that home repairs such as fixing gutters or painting a room are considered general maintenance instead of capital improvements. Repairs may count as capital improvements if they were done as part of a bigger project, such as an extensive remodeling or restoration job, though. For example, replacing a broken windowpane is normally considered a repair. However, if you’re replacing a windowpane as part of a much larger project that involves replacing all the windows in your home, it can count as an improvement.
Tax Credit for Energy-Efficient Improvements
If your home improvements meet certain energy-efficiency standards, you may qualify for the residential energy-efficient property credit. This tax credit allows homeowners to receive a credit that is equal to a certain percentage of the cost of “qualified property.” In this case, qualified property refers to the following types of energy-efficient equipment:
Solar electricSolar water heatersGeothermal heat pumpsSmall wind turbinesFuel cells (with a $500 limitation for each half kilowatt of capacity)Biomass fuel
The following chart outlines what percentage of the home improvement cost qualifies based on the year the improvements happened. To do so, you subtract the increase in your home’s value from the cost of the improvement. The remaining difference can be counted as a medical expense. If your property value does not increase because of improvement, you can count the entire cost of the home improvement as a medical expense. The following home improvements are examples of medical expenses, according to the IRS:
Building entrance or exit rampsWidening doorways at entrances or exits, or modifying hallways and interior doorwaysInstalling railings or support bars in bathroomsLowering kitchen cabinets to make them more accessibleModifying fire alarms and smoke detectorsAdding handrails or grab barsModifying stairways
The Bottom Line
Even though your home improvements may not qualify for a tax deduction, Steber recommended keeping detailed records of your expenses surrounding any home improvements. “They can be important when the time to sell comes or disaster strikes, natural or otherwise,” Steber said. “If you have any issues with expenses or improvements, personal or business, it is a best practice to consult a tax pro to find out what matters on your taxes, and what matters later.” Generally speaking, home improvements aren’t tax-deductible, but there are some tax-saving opportunities worth keeping in mind. Capital improvements can help save money on capital gains tax after selling a home, while certain medical-related and energy-efficient improvements can lead to tax benefits.
