Sometimes we tax professionals can sound like a broken record, but we're gonna say it again...save your receipts!
Any time you make improvements to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace, a new roof, additions, etc., you want to keep track of the total cost. Even if you don't have a home office or rental in your home, these expenses will generally get added to the purchase price of your home (the basis), which helps us accurately calculate the profit you make when you sell your home.
Think of capital improvements as basically anything that is really annoying to do (renovations are the worst while they're happening!) and/or anything that would be a major issue if it came up in a home inspection.
- Changing a light fixture is not a capital improvement, but updating your wiring is.
- Fixing the toilet is not generally a capital improvement, but replacing your plumbing likely would be.
- Painting does not count as a capital improvement on its own, but if you do it at the same time as a bunch of other work, like getting new cabinets installed and repainting your kitchen is part of that, then it counts towards the total cost of that capital improvement.
Note for Folks with a Home Office or Rental
If the capital improvement are entirely for business purposes (for example, if a musician builds out a recording studio in an outbuilding or the basement of their home, or if your primary residence is a two-family and you install new flooring in the rental portion) we'll actually end up depreciating those expenses while you're in the home. Check out our article for homeowners with a home office or rental.
A Couple of Less Common Circumstances to Keep in Mind
Medically Necessary Home Improvements
When figuring out your out-of-pocket medical expenses for the year (remember that homeowners should keep tabs on that), you can include the cost of installing health care equipment or other medically necessary home improvements that benefit you, your spouse, or a dependent. The only thing to be mindful of is that you can't fully deduct improvements that make your home more valuable.
What do we mean by that? Many improvements to make a home more accessible, like adding entrance ramps, widening doorways, or installing railings and support bars, don't increase the value of a home and can be fully deducted. But if you were to add another room on the first floor of the home or fully renovate the kitchen, those things would likely increase the value of your home and so we can't fully deduct them.
This one is not a deduction but a tax credit. However, it's changed a lot in recent years and is likely to expire soon. The main idea is that if you make improvements to make your home more energy-efficient, you may qualify for a tax credit.
To get the full details on the latest version of the credit, check out this article, but if you're thinking about doing things like adding solar power, solar water heaters, new insulation, a new roof, new outside doors, updating your HVAC with something more energy efficient, or other related projects, there's a good chance you may be eligible for this credit.
Important Paperwork To Keep
- Receipts for any appliances that you might sell with the house
- Receipts for any work you have done to the house
- Make sure you've got the numbers from all the different contractors and suppliers
As always, we're here to help if you've got questions. Just reach out to firstname.lastname@example.org and we'll be happy to set you up with a consultation.