How to Deduct Home Improvements

How to Deduct Home Improvements
Electric sander on the floor.

Deduct Home Improvements

Step 1

Keep good records. Make a folder and save all of your receipts and records for any improvements you make to your home. If you're audited, the IRS will want to see them. The cost of labor also counts toward your cost basis, so save your canceled checks.

Step 2

Deduct interest paid on funds borrowed for the construction of a major improvement to your home. Interest for debt incurred up to 2 years before the completion of a major home improvement project or up to 90 days afterwards may be deducted in the year it was paid.

Step 3

Take a deduction for a percentage of your home improvement costs in the year they were incurred if you operate a business out of your home or use part of it as a rental. You can depreciate the business portion of the improvement expenses and take the deduction on Schedule C (Profit or Loss from Business) or Schedule E (Supplemental Income and Loss).

Step 4

Deduct the sales tax you paid on building materials used for a major home improvement in the year you paid it. Take the deduction on Schedule A, Line 5 ("State and local income taxes").

Step 5

Total your major home improvement expenses when you are ready to sell your house. Add that number to the original basis of your home and use the new basis to figure your capital gain.

Step 6

Figure the gain or loss from the sale of your house on IRS Schedule D (Capital Gains and Losses).