article

Home Repairs VS Improvements: No Clear Answer

By Benny L. Kass via Realty Times

bluehammer

Question: I am having trouble figuring out what constitutes an improvement and what is ordinary maintenance. Thinking ahead to selling my house in a few years when the market rebounds, I have been keeping accurate records so that I can deduct these costs to lower the capital gains. Recently, I remodeled a bathroom, replaced a deck, replaced and upgraded the spa filter and motor, replaced the front door with a fiberglass model guaranteed to last more than my lifetime, and replaced a roof and rain gutters. Which of these can I safely regard as improvements, and which are just maintenance?

Answer: The line between repairs and improvements is fuzzy. The Court cases that have analyzed this issue are all over the place, with Judges deciding the exact same work going in opposite directions.

If your property is a rental, then in most cases you want to call the work a repair. Repairs can be deducted as rental expenses in the year that you pay them, thereby reducing your rental income. But discuss this with your tax advisors or your accountant first.

If this is your principal residence, however, while you obviously want to keep your house in good repair, the moneys you spend on ordinary maintenance provide no taxable benefits for you.

Improvements, on the other hand, may be very valuable to you when you sell your house, since they increase the tax basis in your house. The higher the basis, the less tax you have to pay.

Let's look at this example. In 1985, you bought your first house for $100,000, and sold it for $200,000 in l990. That same year, you bought another house for $200,000. Prior to l997, an important tax break for homeowners was called the "roll-over". Although you made a profit of $100,000 when you sold your first house, you did not have to pay any capital gains tax. Instead, the profit was "rolled-over" into the new house. The basis for tax purposes of the second property became $100,000.

You now want to sell, and have listed your house for $700,000. You know that under the current law, since you are married and have lived in the house for two out of the five years before sale, you can exclude up to $500,000 of your gain. You do the numbers and think that because you bought the house for $200,000, and will sell it for $700,000, you are home free on any capital gains tax.

Wrong: since you took advantage of the old "roll-over", your basis was $100,000, and when you sell it for $700,000, you will have made a profit of $600,000. While you can exclude up to $500,000 of this gain, you will have to pay capital gains tax on the $100,000 difference. Currently, the tax rate can be as high as 20 percent, so you will have to send a check to the IRS in the amount of $20,000. You may also have to pay the applicable state tax.

For purposes of this discussion, I am not taking into consideration other expenses which you have paid, such as closing costs, real estate commissions, or legal fees. These expenses will, of course, reduce your overall tax obligation.

How can you increase your tax basis? Here is where improvements play a vital role. Any work which you do to your house that adds to its value, prolongs its useful life or adapts it to new uses (such as "going green") will be considered an improvement and can be added to the tax basis of your property.

bluehammer

Let's take your examples:

remodeled your bathroom: since this clearly prolongs the useful life, it is an improvement;

replaced a deck: this is a grey area. According to the IRS, "a repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life." (IRS Publication 527, "Residential Rental Property" (available free from www.IRS.gov/publications). Since you can claim that the new deck will increase your property's value, I would consider it an improvement.

replaced and upgraded spa filter motor: although it sounds like a repair, since you upgraded the motor, I would consider this an improvement.

replaced the front door: clearly an improvement, since the new door has a very long useful life.

replaced roof and rain gutters: the IRS publication specifically addresses rain gutters, and states "fixing gutters" is a repair. But since you replaced your gutters, once again you are in a grey area. However, since you replaced the roof (which clearly is an improvement), and had to remove the gutters during this process, I would call the entire job an improvement.

The IRS publication contains a list of "examples of improvements" but cautions: "Work you do (or have done) on your home that does not add much to either the value of the life of the property, but rather keeps the property in good condition, is considered a repair, not an improvement."

If your profit will be less than the exclusion of gain ($500,000 for married couples; $225,000 for taxpayers filing a separate tax return), then it probably does not make a difference whether your work is a repair or an improvement.

However, for those who bought and sold homes before l997, and used the "roll-over", and for those whose property values increased dramatically in the early part of this century, improvements will assist you in reducing your capital gains tax obligations to the IRS.

Want to estimate your home improvement costs before talking with a contractor? Claim your home for free with bluehammer to estimate costs, secure your home inventory and learn more about your home.

* THIS REPORT IS AN OPINION THAT MAY BE INACCURATE AND IS PROVIDED SOLELY AS AN INFORMATIONAL TOOL NOT DESIGNED TO PROVIDE DEFINITIVE ANSWERS. ALL ELEMENTS ARE OFFERED "AS IS" AND BLUEBOOK EXPRESSLY DISCLAIM ANY AND ALL WARRANTIES, REPRESENTATIONS, AND GUARANTEES OF ANY NATURE, EXPRESS, IMPLIED OR OTHERWISE, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABLITILY, NONINFRINGEMENT, TITLE, QUIET ENJOYMENT, ACCURACY, OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL BLUEBOOK (OR THEIR SUPPLIERS) BE LIABLE FOR ANY GENERAL, DIRECT, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY KIND, OR ANY DAMAGES WHATSOEVER (INCLUDING WITHOUT LIMITATION, THOSE RESULTING FROM USE OF THE PRODUCT, INCLUDING : (1) RELIANCE ON THE MATERIALS PRESENTED, (2) COSTS OF REPLACEMENT GOODS, (3) LOSS OF USE, DATA OR PROFITS, (4) DELAYS OR BUSINESS INTERRUPTIONS, (5) AND ANY THEORY OF LIABILITY, ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF INFORMATION) WHETHER OR NOT BLUEBOOK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

Know what you should pay for your home improvement projects with bluehammer.Claim your home. It's free!

Popular


Do's And Don'ts For Painting Your Bathroom Cabinets

If your bathroom cabinets are old, ugly, tired, or all of the above, you've probably thought about painting them more than a few times. And if you're like us, you may have done a bit of research but failed to take it further for fear that they won't end up looking decent. But the truth is that if you follow the directions of those who've been there before (and, especially, if you heed their warnings regarding shortcuts and mistakes), you can transform your bathroom pretty easily. This list of do's and don'ts will help guide you.

Nine House Cleaning Tasks That Give You A Great Workout

House cleaning is a drag. That comes as a surprise to no one. But, there is a great side benefit to having a tidy home. Well, there are many, but we're not talking about the psychological advantages of living in a clean home or even the fact that a clean house just plain looks good. We're talking about working up a sweat. Go ahead and skip the gym. Grab the broom or the vacuum cleaner instead. Turns out the simple acts of sweeping, vacuuming, and so many more housecleaning tasks can give you a great workout.

Is School Improvement Part of Your Ownership Strategy?

Neighborhoods with good schools often carry higher value for home buyers with children, so if you want to raise values in your neighborhood, supporting school improvement may be a valuable undertaking.

Tips For Creating A Luxe Bedroom

Creating a relaxing, romantic retreat of a bedroom is the goal, but it's not as easy as just loading the furniture in and making the bed. Many people find that even with beautiful pieces and great space, their bedroom is still lacking that something special. A few tips and the right mix can make you feel more serene, help you sleep better, and even make you feel more amorous in your private sanctuary.

6 Ways To Create A More Serene Stress-Free Home

Your home is supposed to be your haven, the place where you can relax and wash away the stresses of the day. But, if your house is messy, cluttered, or designed in a way that opposes certain Feng Shui principles, it could actually be adding to your stress. Apply a few tips to make your home the serene spot it should be.

Bright Ideas: How to Light Up Your Rooms

These clever tricks banish dim interiors and dark corners, and usher natural light into the house.

Chimney Liners: Does Your Home Have One - Do You Even Need One?

You rely on your chimney being safe. Whether you use your fireplace for wood-burning fires, you have a furnace that vents through your chimney, you utilize a wood stove or gas insert, your chimney needs to be able to handle heat and sparks without allowing damage to your home. Stone or brick chimneys can be made safer with a flue lining that helps to move heat and gases up and out of your home.

Getting your home ready for that big party

Preparing for a party can be a hectic time - you have a full slate on your to do list, including choosing the menu, preparing food, planning activities, and coordinating decor. It can be easy to overlook one of the most important elements of planning an event, making sure your home is presentable for your guests. Our guide will help you to quickly get your house party-ready so you can focus on all the other things involved in preparing for your event.

Stylish Bath Storage Solutions: Ways to Complement Your Bathroom Vanity

Finding adequate storage is a particularly challenging problem in bathrooms, and not just because they are usually the smallest rooms in the house. Bathrooms have increasingly become the place to store a large and diverse number of items, including bath towels, beauty supplies, toiletries, hair care products, medications, soaps, shampoo, and assorted cleansers. And if the primary inhabitants of the bathroom happen to be teenagers, then the demand for storage space increases exponentially.

How to Upkeep Your Home So Neighbors Are In Awe

Homeowners are responsible for the quality of their home with the maintenance and care that they provide for the building throughout the year. Every home requires a specific amount of upkeep to ensure that it maintains its value and has a high level of appeal. To keep your neighbors in awe of your home, there are a few important steps to take to allow it to stand out in the local area.

See More Articles