While it is common knowledge that by performing house improvements you can raise the value of your home, what most people do not know is that it also can help lower your overall tax fee when you put your house on the market for sale.
If your house has a higher value, tax rules state that your total profit will be lowered as a result.
However, not all home improvements help lower your tax rate. So, here’s a list of what does payoff:
- New bathroom
- New addition
- Basement finishing
- Master suite addition
Capital Improvements
The IRS (Internal Revenue System) has a specific way of classifying which repairs are capital improvements – and hence will increase your house value.
They distinguish between capital improvements and repairs in the following way:
Repair – a repair is something that maintains the good condition of the house, like painting it, or cleaning the gutters.
Capital Improvement – it is something that increases the life of the house, and adds value to it, like replacing the entire roof or putting in extra windows.
Repair Vs Capital Improvement
the line between a repair and capital improvement is thin, and if you are serious about finding methods for your tax to be deducted, you need to know about it.
For a better understanding, take a look at these two examples.
Windows – Fixing a broken window is a repair. But, installing a new window in your home will count as a capital improvement.
Roof – If you replace a few broken shingles on your roof, it will be counted as a repair by the IRS. However, if you replace the whole entire roof, it will count as a tax deductible.
Limitations of Capital Improvements
The IRS has put certain rules on the capital improvements a home owner does, and it is important to be aware of them if you are considering selling your real estate.
These rules talk about the type of improvements and whether they will be considered or not – for example, if you first improved your house with carpeted flooring, but then a few years later replaced those for hardwood floors, the carpet flooring will not be taken into account.
Another limitation that the IRS has is that for a capital improvement to be counted when it is time for selling, the improvement has to be evident. For example, if you replaced the roof of your home, ten or so years ago, but then by the time you got around to selling it was broken again, it would not be counted.
Exception of Capital Improvement
The IRS has made an exception in case of a natural disaster or fire – in a case like that, any repairs you make to fix the house back to what it was like before the disaster will be counted as a capital improvement by them.
We hope this article is helpful for you and you have a better understanding of tax deductibility after reading it!
