Many homeowners have become reluctant to put more money into remodeling and repairing their homes in today’s market, but we’ve heard a lot about tax deductions offered for home improvements lately.
While some home improvements will be eligible for a tax deduction, home repairs essentially offer no immediate tax benefits to the homeowner.
So, what’s the difference between an improvement and a repair? The Internal Revenue Service claims, “A repair keeps a homeowner’s property in good operating condition but it does not:
- Materially add to the value of the property,
- Substantially prolong its useful life, or
- Make it more useful.”
The key difference between a repair and an improvement is that a repair basically returns the property to the state it was in before it stopped working properly. The property is not substantially more valuable, long-lived, or useful than it was before the need for the repair arose. In contrast, an improvement makes property substantially more valuable or useful than it was before the improvement.
Examples of repairs include:
- Fixing gutters
- Fixing floors
- Fixing leaks
- Replacing broken doors or windows
Examples of improvements include:
- Adding a deck
- Building an additional bathroom
- Installing a new heating system
- Putting on a new roof
- Energy-efficient improvements found on Energy.gov
Keep in mind that the tax benefits vary depending on the improvement. While a tax deduction for home improvements can reduce the amount of income on which tax is payable, a tax credit directly reduces the tax itself. Tax credits are available for many types of home improvements. For example, installing insulation, adding energy-efficient windows, and some types of highly efficient equipment for cooling and heating, and solar water heating may all qualify for tax credits.
We recommend that before you get out that hammer and start any improvements, obtain advice from your tax consultant or local IRS office.