Can Home Remodeling Be Used As A Tax Deduction When I Sell?

The IRS allows a tax deduction for a home improvement when you sell your home.

The IRS allows homeowners to receive tax benefits for maintaining your primary residence and making capital improvements over time. Certain home improvement projects are deductible when you sell your home, effectively reducing your taxable capital gains. There are specific rules governing what type of home improvements are deductible, as well as some other guidelines that you must follow in order to take these deductions. Let's take a look at what you need to do, and what type of improvements are tax deductible when you sell your home.

First, The IRS Rules

In order to reap the tax benefits, you must live in the home for two of the past five years leading up to the sale. If you've met these criteria, you may deduct any home improvement cost as long as it meets the IRS rules for a “home improvement.” The standards are:

“ any improvement must add value to the home, prolong its useful life, or adapt it to new uses.” Additionally, the improvement must be in place when you sell the home. The deduction is taken against the capital gains of your home when you sell.

Let's look at an example:

You purchased your home for $500,000 dollars. This is your basis cost. 10 years later you sell for $900,000 making a $400,000 capital gain. The IRS offers a no tax provision on the first $250,000 of profit as a single homeowner ($500,000 for couples). That leaves a taxable capital gain of $150,000. Here's where home improvement deductions come in. During the time you lived in the home you replaced all of your windows spending $5000 and you also replaced the furnace with a more energy efficient model at a cost of $5000. Two years ago, you completely remodeled and updated the kitchen at a cost of $40,000. All of these home improvements add value to your home and are tax deductible. They total $50,000 reducing your taxable capital gain to $100,000.

This is a great reason to save those receipts when you do any home improvement!

What is a Deductible Home Improvement?

The IRS is very specific as to what constitutes a home improvement. For example, normal maintenance costs and repairs are not deductible. If your roof leaks and you replace a few tiles, that's a repair. But if you replace the entire roof, that prolongs the life of the home and is considered a capital improvement and is deductible. Let's look at some specific areas that the IRS allows you to deduct when you sell your home.

• Plumbing, Heating, Electrical

Any upgrade you make to your plumbing system like adding a new septic system or a whole house water filtration system qualifies. What doesn't qualify is piping and repairs, or toilet replacements. This is a bit tricky. If you install at water conserving toilet or upgrade your plumbing system those costs are deductible. If you upgrade or replace your furnace with one that is more energy efficient that a deduction as well.

• Interior Remodeling and Upgrades

Adding a room addition like a deck, or bedroom qualifies. If you upgraded your kitchen or added built in appliances, these would also qualify, as would finishing your basement. In general, any modernization efforts that increase your home's value at sale, qualify. Flooring is a gray area. Upgraded flooring qualifies if it is still in place at the time of the sale. For example, if you installed new carpet 10 years ago when you moved in, then replaced it before selling your home, it is not deductible.

• Exterior Home Renovations

Exterior improvements that qualify include landscaping, an in-ground pool, a new fence r a roof replacement. Exterior repairs that are not capital improvements are not deductible, for example replacing a broken window or some shingles. Painting your home can improve its appearance and even increase its value at sale, but the IRS considers this non-deductible as it doesn't meet the criteria for adding value, adapting the home, or increasing its lifespan.

• Miscellaneous Improvements

Improvements that stay with the home at the sale, like a built-in wireless network, a surround sound audio system or even a home security system are acceptable. You can also deduct the cost of window and door replacements that increase your homes energy efficiency. Attic, interior wall, or piping insulation also qualifies since it lowers energy costs.

Not Sure If Your Home Remodeling Project Is Deductible?

If you're working with a design build firm consult with them. While it is not legal advice, based on their understanding and experience, they should be able to tell you if your project will be deductible. In any case, make sure to save all of your receipts for any work done on your home.

The best solution is to speak with your accountant or financial adviser. They will be current on IRS rules and any changes to the tax code that you may benefit from, for example, the IRS has offered tax relief for homeowners who install solar panels. The laws do change from time to time. Your accountant can keep you abreast. If you're looking for more in-depth information, IRS publication 523 offers additional examples and a home improvement cost deduction guide.


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