When filing your tax return, it’s important that you know how home improvements or repairs work for tax purposes. Any work made to significantly add value to your home, increase its useful life, or prepare it to use in another way is called home improvement. Whether you add more rooms and bathrooms, improve your fence or landscape, they all fall under home improvement which you can use as tax deductions. You cannot deduct expenses that are made for personal reasons as a resident of your own house.
Home improvements also offer tax benefit by reducing the amount of taxes owed when selling your home with a profit. This happens because the home improvements are added to the tax basis of your home. The greater the amount of your investment in your home is for tax purposes, the less profit you’ll get when the home gets sold.
It’s important to clarify the difference between a home repair and a home improvement. A home repair for tax purposes is only done to keep your home in good condition. Repairs like home repaint and fixing leaks doesn’t substantially add value to your home. A home improvement, on the other hand, adds value to your home making it much better than it was before. The costs spent to restore your home into a like-new condition are improvements that can be used as a deduction. Examples are already mentioned above.
It is therefore useless to make repairs to your personal residence because you won’t be able to benefit from it in terms of paying taxes. Qualifying for a home office deduction or renting out part of the home is the only way to deduct all repair costs incurred.
What is Home Office Deduction all about?
If you’re a businessman and you use a portion of your home as an office to operate your business, you are qualified for home repair deductions. Now it's important to remember that your business must be legal and the specific part of your home is used exclusively for business purposes. There will be no problem with regards to deducting all of the costs for repairs as long as it is solely used to make your home office. For instance, you want to replace a broken window in your home, the entire costs incurred in repairing and replacing the window can be deducted.
If you need to repair an air conditioning or heating system in your house, you can use the same percentage that your home office occupied in your house. For example, if you used 30% of your house as a home office, 50% of your repair costs used for the benefit of the entire house can be deducted.
What is Renting Our Part of Your Home all about?
Renting out a portion of your home to someone else is another way to deduct home repair costs. If you’re in this situation, you may deduct all or part of the expenses as rental expense. Your rental income will be deducted from the total rental expense. Similar with the home office deduction, if improvements are only done to a portion of the home being rented, deductions can be made in full while repairs benefiting the entire home can be deducted based on the percentage of rental use of the home.
Preparing For Home Repair Deductions
Now that you know what kind of repairs and how much you might be paying for tax, you should start preparing everything you need whether you’re filing in person or you hired a tax preparer to file for you. Make sure that all your receipts containing all improvement costs are compiled and safely kept in a folder. You may also experience an increase in house prices for many years if you’ve lived in your house within those years which will mean the sale from your house will be taxable. You don’t have to worry because you can reduce the taxable gain by including the home improvements to the cost basis of your house. You can also write off part of your home that was included on an adjusted basis through depreciation only if your home is used to operate your business or is a portion is rent out.
