How to Deduct Home Improvements

Electric sander on the floor.
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Home improvement expenses are not deductible on your tax return in the year they are incurred. They are considered capital expenditures and are added to the basis of your home -- the price you paid for it plus closing costs and legal fees. When you sell your home, the increased basis decreases your capital gain and your tax liability. There are, however, some expenses related to home improvements that you may deduct.

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).

Tip

Major home improvements add to the value or prolong the life of your home. They include adding an addition, major remodeling, replacing the entire roof, paving the driveway, installing central air conditioning and major rewiring. Minor repairs maintain your home in good condition. They include painting a room, replacing a carpet, fixing leaks or plastering walls. Those costs cannot be added to the basis of your home, nor can they be used as an ordinary deduction unless you also use your home for business.

Things You'll Need

  • Receipts

  • IRS Schedules C, E and D

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