How to Deduct Home Improvement Expenses

Installing new walkways for a home adds to its value and is deductible when the house is sold.

The longer you remain in your home, the more it will need repair. Aside from basic upkeep, you will also want to make improvements from time to time, such as installing energy-efficient windows or adding a deck to the back yard. These repairs and upgrades can be costly, but you can recoup the costs when you sell the house or immediately if the government is offering special tax breaks for certain home improvements. These tax deductions are available to any property owner who makes long-term improvements to his home or property.

Things You'll Need

• Receipts of improvements

Instructions

1. Watch for temporary deductions and tax credits that are available for home improvements. From time to time, the government encourages certain types of home improvements with programs that allow the costs to be deducted or a portion of the cost to be taken as a tax credit. In 2009 and 2010, energy-efficient window installation could earn you a 30 percent tax credit. A similar discount was also offered with an array of energy-efficient improvements in the 1970s and 1980s. These are not permanent tax deductions, so you may want to consider making the improvements when you can minimize the cost.

2. Take out a home improvement loan to pay for home improvements and repairs, especially if they are urgent, such as a leaky roof or a heating system. This will allow you to tackle costly work right away, and the cost of any points associated with the loan can be deducted from your taxes in the year they were incurred.

3. Keep records and receipts of all of the home improvements you make. The cost of the work is added to the cost basis of your home, which makes it look as if more money was paid for the house. For an improvement to qualify as an adjustment to your home cost basis, according to the Internal Revenue Service, it needs to have a useful life of more than a year. Qualifying improvements can be a special assessment for local improvements or costs you incurred to restore a home after it was damaged. Items that are considered improvements include but are not limited to room additions, central air conditioning, driveway, water heaters, modernization, a new roof and insulation.

4. Deduct the costs of improvements from your capital gains when you sell the house. Because the cost of all of the improvements adds to your house's cost basis, it minimizes capital gains taxes you will owe when you sell the home. Tthe cost of the improvements are deducted from the sale price of the house as the purchase price of the house is deducted.

Tips & Warnings

• If you make a home improvement and then replace it later with another improvement (for example carpeting or a hot water heater), you can count only the most recent improvement in your home cost basis when the house is sold.

References

• IRS: Publication 523
• IRS: Seven Facts about the Nonbusiness Energy Property Credit