When you incur expenses to make home repairs, the cost may not always be deductible for your personal residence. If you make repairs to rental property you own, though, you can save some money in tax for its cost. Before claiming any deduction, you need to understand the difference between a home improvement and a repair, since they are treated differently for tax purposes.
Improvements vs. Repairs
Regardless of how you use the home, repairs and home improvements are different in that an improvement is not deductible. As of 2011, the only exception is a limited tax credit for certain energy-efficient appliances, which expires at the end of the calendar year. A home improvement is more substantial than a repair because it prolongs the useful life and increases the value of the home. For example, replacing old windows with expensive energy-efficient ones is a home improvement, but replacing the glass on a broken window is a repair. The difference is that a repair only maintains the working condition of the home and doesn't add value to it. The costs of your home improvements are not deductible, but increase the tax basis in your home. Tax basis represents your overall investment in the home and determines how much taxable gain there is when you sell it.
Personal Residence
If you make repairs to a home that you use as a personal residence, there is generally no deduction available for the cost. For example, if part of the linoleum floor in your kitchen starts peeling and you hire a repairman to replace sections of the floor, then this is a nondeductible repair. If you decide to replace the entire floor with marble tiles, this is a home improvement that increases your tax basis.
Casualty Losses
A casualty loss is one exception to the rule disallowing repair deductions on personal residences. A casualty is a sudden event that causes damage to your home, such as a hurricane, tornado or even vandalism. For example, if your roof is destroyed after a strong hurricane, the cost to repair it may be deductible as a casualty loss, but only if you itemize your deductions. Generally, you must reduce your loss by any insurance reimbursements you receive. The actual monetary loss is subject to other reductions. First, you must reduce the loss by $100 and then reduce it again by an amount equal to 10 percent of your adjusted gross income.
Rental Properties
Since the purpose of a rental home is to generate rental income, the IRS allows you to deduct all expenses you incur to maintain a rental home you own, including the cost of repairs. You must fill out a Schedule E attachment to your tax return each year to report the rental income and expenses. The schedule provides space for you to report any repairs you make to the property. If a window breaks and you replace it with the same type of window, this is a repair that you can fully deduct. Home improvements you make to the rental home are treated the same way as your personal residence and will only increase the tax basis of the property.
Tags: home improvement, rental home, your home, casualty loss, home improvements, increase basis
