Improvements Versus Repairs

The financial distinction can be important and often overlooked.

Woman with tool belt and using power tools, adding tile to fireplace.

The distinction between home "improvements" and home "repairs" may be lost on some people. After all, any repair is in some sense an improvement. Rest assured, however, that this distinction is never lost on the IRS. In the context of taxes, the difference is a critical one.

To help you better understand what constitutes an improvement - and why that matters come tax season - let's take a deeper look into this issue.

Differentiating Between Improvements And Repairs

The first thing you need to understand about home improvements vs. repairs is that there is no hard and fast, clearly delineated rule that places work on your home in one category or the other. Sometimes, the line between the two can be blurry.

Generally speaking, improvements are things that materially increase the value and life of your home. Think along the lines of a new addition, a swimming pool, a new energy-efficient HVAC system, etc.

Repairs, on the other hand, generally fall into the category of routine household maintenance: Painting, repairing cracks, fixing a gutter, etc.

Why Is This Distinction Important?

In two words: tax relief. Paying for improvements increases the tax basis of your home. This is the figure subtracted from your sale price to determine your profit. The larger the basis, the lower your tax bill. The cost of home repairs does not affect your tax basis.

There's another key element to note: You don't receive the tax credit for making improvements as you go along. Rather, all of the tax benefit comes at the time of sale, which means that you'll need to track your home improvements over the years which you own the property. Doing this isn't quite as critical as it was in the past, as tax code changes have excluded taxes on home sale profit for most owners. Currently, the first $250,000 profit is tax-free for singles, and the first $500,000 is tax-free for married couples. If you expect to clear more profit than this, however, tracking remains very important.

Making the Determination

So what's the best way to determine whether work is an improvement or repair in cases where the answer isn't obvious? Ask yourself this: Did the work add value to the house, extend its life or increase its efficiency? Does it fall outside the realm of ordinary, day-to-day maintenance? Then it's very likely an improvement. Remodeling a kitchen, building a deck, adding a new door - all solidly in the improvement category.

If the work keeps your home in good condition but doesn't extend its life, then you're likely looking at a repair. Fixing gutters, for example, is classified by the IRS as a repair.

The Takeaway

Understanding the distinction between a repair and an improvement is critical when it's time to sell your home. By understanding the issues outlined above, you can maximize your tax break when it's time to sell.