It costs a lot of money to maintain a house. As you spend money on home repairs, you likely wonder if you can write them off on your tax returns. While it would be great if you could treat home improvements as a tax deduction, the average person cannot do so if they use the home as their primary residence.
There are exceptions, though. If you make home improvements, you can add the cost to your cost basis when you sell the home. This may lower your tax liabilities on the capital gains along with the capital gains exclusion.
However, if you own a rental property, you are entitled to deduct your home repair and improvement costs since they are a business expense. You must keep up the property if you want to keep renting it out and earning cash flow.
What Type of Home Improvements Are Tax Deductible?
As a landlord, you can write off certain home improvements in addition to the depreciation expense you can claim for the life of the home (27.5 years).
If you make any capital improvements to the home, such as a new roof, new appliances, or new kitchen counters, you can write off the expenses as a business expense but you’ll have to spread the deduction out over several years. You can only write off expenses that make improvements meant to last longer than a year, such as a roof or new appliances.
When you sell your rental property, though, you’ll pay capital gains tax. It’s important to talk to your tax advisor before selling so you can offset your capital gains tax as much as possible.
List of Tax Deductible Home Repairs
- Adding Or Extending A Roof
- Home Office Improvements
- Creating A New Bathroom
- Adding A New Bedroom
- Installing A Furnace
- Adding A Swimming Pool
- Creating A Basement
- Adding A Home Extension
- Installing A Loft
- Energy-Efficient Renovations/Upgrades
- Medically Necessary Renovations/Upgrades
All of the capital improvements listed above can be treated as tax deductions for a rental property. Importantly, all of the capital improvements that you make can be seen to increase the value of the home.
This is important, because it increases the tax deduction that you can claim through rental property depreciation.
With smaller repairs and fixes (like plumbing costs, AC repairs and general wear and tear) you can claim the tax deductions in the tax year that they occur. With capital improvements, you spread out the tax break over the useful life of the property (27.5 years for a rental property).
What Type of Home Improvements Aren’t Tax Deductible?
As a landlord, any repairs or improvements you make that are ‘capital improvements’ or improve the property’s value are tax-deductible. But, if you live in the property yourself, your home improvements or home repairs are not tax-deductible except for these two situations:
- Energy-efficient renovations – If you install energy-efficient water heaters, solar panels, or heat pumps. The tax credit is slowly decreasing through 2023, but you’ll still get a credit, plus the savings on your utility bills.
- Medically necessary renovations – If you need to make changes to your home to make it more accessible, such as a ramp, modified bathroom, or lowering the cabinets, you may be able to deduct the expense as long as it doesn’t improve the value of your home as that would provide you with higher capital gains.
Home Repairs vs Home Improvements For Tax Purposes
It’s important to understand the difference between home repairs and home improvements, especially when deducting them on your tax returns for rental properties. Home repairs are things you must to do make a home operational. Fixing a leaky pipe, replacing a broken hot water heater, and replacing broken shingles are home repairs. You must do them to keep the home habitable.
Home improvements are things you do to a home to make it better and sometimes worth more money. Home improvements aren’t necessary – you do them because you want to give the home more features or make it worth more money.
It essence, a home improvement increases the value of the home. This is why home improvements are also called ‘capital improvements’.
Home repairs ensure that all the existing features of a home continue to work in the way that they are intended to. When something breaks or stops working, the cost to fix it is classified as a home repair.
Other Expenses You Can Write off on a Rental Property
If you own property as a landlord, not only can you write off the expenses you incur to keep the home up, but you can also write off the expenses that you incur to be a landlord including:
- You have a home office where you only conduct your business, you don’t use it as a family room or bedroom.
- You travel for your landlord business. If your property is located out of town and you visit it a couple of times a year, you could write off the expenses incurred only if it’s strictly a business trip.
- You have to buy equipment to run your business including a computer or any equipment you buy to maintain or improve the property yourself.
Are home improvements tax deductible?
If you are a landlord, you may be able to lower your tax liability by writing off the expenses to maintain or improve your properties. You can’t write off expenses incurred at your primary residence though. However, if you spend money to fix up your home, chances are you’ll make more money when you sell it and since you increased your cash basis of buying the home, you’ll have lower capital gains in the eyes of the IRS, so it will lower your tax liability. While this is a small tax break, the tax deductions that you can apply to rental property far outweigh the tax deductions you can apply to your primary residence.
No matter what type of property you own – a rental property, primary residence, or a fix and flip, you’ll pay taxes when you sell it. Knowing how to reduce those taxes and protect your investment is the key to a profitable investment.