To be eligible to be part of certain tax deductions and credits, home repairs must be done as part of a home improvement. The IRS distinguishes between home repairs and home improvements by saying that home repairs are jobs performed for the upkeep of the home while home improvements add value to the house. Examples of home repairs would include replacing broken windows or old carpet. Home improvements would be adding a new room to the house or building a pool. If you perform home repairs as part of the home improvement, you can include those costs as well.
Interest on Loans
If you took out a mortgage or home equity line to finance your repairs or improvements, you will be able to deduct some of the interest from you taxes. For home repairs, the deduction is limited to the interest on the first $50,000 of your home equity loan if you file a single return or $100,000 if you file a joint return with your spouse. For home improvements, as long as the entire amount of the loan is used to improve your home you can deduct the interest on the first $500,000 of your loan if you file a single return or $1 million if you file a joint return with your spouse.
Medical Necessity
If your health or the health of another person in the house necessitates a home improvement, you may be able to deduct the costs as a medical expense. Only medical expenses that exceed 7.5 percent of your income can be deducted. If you plan to claim this deduction, make sure you have a doctor's verification that the improvements were medically necessary.
Energy Efficiency
If you add energy-efficient items to your home you can claim a tax credit. This tax credit is applicable even if the project would typically count as home repairs, such as replacing doors or windows with energy efficient products. There are two categories for this tax break. The first applies to windows, ventilation, doors, heating, roofing, insulation, air conditioning, non-solar water heaters and biomass stoves. The installation of these items are eligible for a 30 percent tax credit up to $1,500. The installation of solar panels and water heaters, small windmills, fuel cells or geothermal pumps also gets a 30 percent tax credit but there is no cap on the amount of the credit.
Resale Basis
When you sell your home the amount of taxes that you pay is depending on your profit on the sale, which is determined by the sale price minus your basis in the house. Your basis is usually the amount of money you paid for the home. However, if you invested in your home through home improvements, including the cost of associated home repairs, you can add those to your basis to decrease your taxable profit.
Tax Deductions Versus Tax Credits
Tax deductions help you by reducing the amount of taxable income you have at the end of the year. Deductions that are itemized mean you cannot also take the standard deduction. Tax credits reduce your tax bill directly. For example, if your tax rate was 20 percent and your taxable income was $40,000, you would pay $8,000 in taxes. If you claimed a $2,000 tax deduction, it would reduce your taxable income to $38,000 and so your tax bill would be $7,600. If you claimed a $2,000 tax credit, it would reduce your tax bill to $6,000.
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