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If you’ve considered putting some substantial dollars into improving your home, or if you’ve recently spent a lot of your hard-earned dollars on home renovations, you might be wondering what kind of bang you’re getting for your buck, so to speak. While some home improvements will no doubt get you a better price when it’s time to sell – like kitchen and bath renovations, for example – the vast majority of home improvements will not present you with an immediate tax advantage. Here’s why.
Though it may seem to you that repairs and improvements fall into the same category, but that’s not true, say tax experts. And this is where semantics matter! While it would appear that a repair or renovation constitutes an improvement to your home, the IRS has a different take on the situation.
According to that agency, a repair is a modification that restores a home to its original state and/or value. Repairs are items that usually prompt fairly immediate attention, like fixing a broken window or replacing a water heater. With very few exceptions, home repairs are not tax deductible.
On the other hand, improvements are modifications that increase the value of your home, prolong its life, or adapt it to new uses, like upgrading your insulation, installing a new roof, putting in a new septic system, or adding wheelchair ramps or an elevator for medical purposes.
However, in many cases, you still won’t be able to claim a tax deduction on these items until the tax year in which the home is sold. That’s why it’s essential to keep good records as to the expenses involved with these improvements. You’ll want to keep all the receipts for materials and works performed by contractors or sub-contractors.
Furthermore, the IRS says that the improvements must still be evident when you sell. For example, if you put wall-to-wall carpeting in your entire house 8 years ago and then replaced it with hardwood flooring 2 years ago, you cannot count the cost of the carpet as an improvement.
If you’re ready to spend some money on capital improvements that’ll pay off in the long run, here are a few options.
If you’re hoping to make improvements that fall into the category of tax deductible, speak to your tax expert or to an experienced and trusted contractor in your area for more information and details about what items can reduce your tax bill either now or when you sell.