Michael P. Rudy and Associates - mrcpa.net

How do home improvements affect your taxes?

One of the questions that tax preparers hear all the time is: “I added a sun room (added a deck, replaced the roof, caulked the bathtub—you fill in the blank). Can I take it off my taxes?” The short answer? “No.”

The longer answer that requires more explanation is: “not until you sell your house.” Save those receipts and records of any improvements you make to your home because the cost of the improvements will be added to the purchase price of your home to determine the cost basis of the house when you sell it. The basis is subtracted from the sales price (with certain adjustments) to determine the gain or loss on the house.

Right now, with the law allowing people to exclude $250,000 from capital gains on the sale of a house ($500,000 if you’re married and are filing a joint return), most people will not have capital gains to report, and capital losses on personal residences are not deductible. However, if you’ve lived in your house for many years, and if housing prices follow their traditional increases, you may have a fairly large gain that would be minimized by including the improvements in the basis of the house.

If you operate a business from your home or rent a portion of your home to someone, part of your home improvements may be deductible as business expenses through depreciation.