Primary residence: few deduction options
If you use your home as a primary residence, odds are you cannot deduct home improvement project expenses on your taxes. The government considers this regular spending, just like if you went to the store to buy a shirt or computer.
However, those home improvement costs can lead to a tax benefit down the road when you decide to sell. Any home improvements raise the cost basis of a property. For example, if you buy a home for $250,000 and put $50,000 into the property, you have a cost basis of $300,000 for the home, even if you only paid $250,000.
When you sell a home, the capital gain on the property may or may not be taxable depending on how long you owned the home, why you’re moving, and your income. Typically a portion of a home sale is taxable if any. But if you do have to pay taxes, those home improvement projects can lower your net income from the property, thus lowering taxes.
If you plan to add to the cost basis of a home, make sure to follow all rules around depreciation. When in doubt, hire a tax professional to ensure you follow the law.
Home office and rental areas: a mixed bag
If you use a room in your home exclusively for business purposes, such as a home office or rental unit, you have more options to deduct home improvement costs. It all depends on which parts of the home are improved and who gets the benefit.
If you do improvements to a home office or rental unit directly, those costs are deductible on your taxes. For example, if you work from home and add a built-in desk or bookshelf to improve your work storage and productivity, the costs are deductible. Similarly, if you do upgrades to a rental unit, you can depreciate and deduct those costs. Any home improvement cost is considered a long-term investment and must be depreciated over time, you can’t just write off the cost in one lump.
If you do an improvement that affects the entire property, such as a new furnace or air conditioner, you can deduct the cost proportionally based on the size of the business area of your home. For example, if you have a 2,000 square foot home and a 200 square foot office, you could deduct 10 percent of the cost for a full-home improvement project.
To summarize, for business purposes you can deduct anything directly related to the space you use for your business or a proportion based on the percentage of your home used by the business.
Investment properties: write everything off
If the property in question is not your primary residence, you have an entirely different set of rules. Because the property is a business, you can write off every cost related to property upgrades and improvements.
Like with a home improvement at your primary residence, you must follow depreciation schedules for your deductions. Depreciation follows special IRS regulations. The most common depreciation method for a new investment falls into MACRS, or modified accelerated cost recovery system. This is a fancy way of saying what percent is allowed to be deducted each year. Generally any real estate acquired in or after 1987 uses MACRS, while older assets use ACRS, the older version of the tax deduction schedule system.
Everyone needs a home, so the IRS does not let you deduct for your primary residence. However, for an investment property, you are running a business and can get the same benefits of any other business looking to save on taxes through deductions.
Follow the law and take advantage of what you can
Warren Buffett and Donald Trump don’t agree on much. However they do agree that businesses and individuals would be foolish to skip out on a legal tax deduction for which you qualify.
If you are doing any work on an investment property or business focused area of your home, tax advantage of the tax savings. If you invest in your primary residence, keep records so you can deduct the costs when you sell. Your future self will thank you!