When Home Improvements and Repairs Qualify for Tax Deductions
Most home improvements are not deductible because they are classified as personal expenses. The main tax benefit that they offer involves their impact on the tax basis of your home. The improvements will increase the tax basis, which will reduce the amount of your taxable profit and thus your overall tax burden if you sell the home. (Read more here about how the tax basis of a home is defined.) Improvements do not increase the tax basis of a home if they are added but then removed before the home is sold.
Repairs do not qualify as improvements and do not have an impact on the tax basis of a home. You should understand the difference between improvements and repairs. Improvements are alterations to your home that increase its value, adapt it to a new use, or increase its useful life. By contrast, repairs simply keep a home in proper condition by addressing problems or hazards that arise on the property, or by conducting routine maintenance. Repairs do not greatly increase the value of the home.
In certain circumstances, you can deduct the cost of home improvements over multiple years, which is a process known as depreciation. There are two main ways to qualify for depreciation. First, you may be able to use depreciation if you use part of your home as an office for a business that you run. You can read more here about the home office deduction. Any improvements that you make to the area of your home that is used as an office are fully deductible through depreciation. Some improvements may benefit the entire home, including the home office. You can deduct the cost of those improvements in proportion to the percentage of your home that you use as an office. For example, if you use 30 percent of your home as an office, you can deduct 30 percent of the cost of an improvement that benefits the home as a whole.
The other main way to use depreciation for the cost of an improvement involves renting out part of your home. You can claim the improvement cost as a rental expense and deduct it from your rental income. The same rules apply as to depreciation based on a home office. If the improvement benefits only the rented area of the home, you can fully deduct the cost. If it benefits the home overall, you can deduct the cost in proportion to the rented part of the home.
Unlike improvements, repairs are immediately deductible in the two above situations, rather than requiring depreciation. The same rules apply regarding the percentage of the cost of repairs that you can deduct.