Improve this house and save
If you make capital improvements to real estate you own---an improvement that substantially adds to the value of a building you use for business or rent out---you can claim it as a deduction. You can't, however, take the entire deduction off your taxes the same year you make the improvements. Instead, you have to depreciate the improvement investment over the years. Repairs, on the other hand, can be deducted in the year that they're made and many people try to claim improvements as repairs. The IRS has instructions on differentiate the two.
Instructions
Deducting Capital Improvements
1. Determine whether your project is an improvement or a repair. Legalmatch.com says an improvement adds value to the property, prolongs its life or adds a use---a hot tub on the deck, hurricane shutters, a new garage. Repairs don't add to the value of the property but keep it in good operating condition. For example, fixing a roof after a storm counts as a repair; installing a new roof is an improvement, according to the IRS.
2. Keep and file receipts for everything you spent on the improvements. This includes supplies, rental trucks and whatever you paid to hire workers for the project. These figures, totaled, are the costs you will be able to amortize over the next three decades.
3. Find the depreciation period. The IRS says that for residential rental property, the depreciation is 27.5 years; for nonresidential property, it's 39 years. There are several exemptions for special classes of property so it will be necessary to go over the IRS guidelines to get a definite timeline.
4. Apply the depreciation formula. There are several different formulas, one of which is straight-line---deduct equal amounts off your taxes in each year---and others which have the largest deduction the first year, then smaller deductions as the time goes on. The IRS website provides requirements and recommendations for the right one to use.
Tags: adds value, Capital Improvements, There several, value property, your taxes
