Is a Pool a Home Improvement for Tax Purposes?

Home improvements affect a homeowner’s financial situation regarding taxes. While many homeowners focus on immediate benefits, certain home expenditures can have tax implications. Understanding these implications, especially for additions like a swimming pool, can lead to long-term financial advantages. The Internal Revenue Service (IRS) distinguishes between routine repairs and capital improvements, with only the latter affecting your tax position.

What Qualifies as a Capital Improvement

A capital improvement is a durable upgrade, adaptation, or enhancement of a property. These improvements are distinct from routine repairs or maintenance. For tax purposes, it must add to the home’s value, prolong its useful life, or adapt it to new uses. The improvement should be permanent and expected to last for more than one year.

Examples of common capital improvements include adding a room, renovating a kitchen or bathroom, replacing a roof, or upgrading major systems like electrical or plumbing. Landscaping, driveways, fences, and even a swimming pool can also qualify as capital improvements if they meet these criteria. Conversely, activities such as painting a room, fixing a leaky faucet, or replacing a broken window pane are considered repairs or maintenance and do not qualify as capital improvements.

Impact on Your Home’s Tax Basis

A qualifying home improvement, such as a swimming pool, directly impacts your home’s “adjusted cost basis.” The cost basis is its original cost plus capital improvements. This increased cost basis can reduce the taxable gain when you sell your home.

For personal residences, capital improvements, including a pool, are not deductible in the year they are made. Instead, the tax benefit is realized at the time of sale. By increasing your home’s cost basis, the amount of profit subject to capital gains tax is reduced. For instance, if you buy a home for $300,000 and later spend $50,000 on capital improvements, your cost basis becomes $350,000. If you then sell the home for $750,000, your capital gain would be calculated based on the $350,000 adjusted basis, rather than the original $300,000, potentially reducing your taxable gain.

Homeowners can exclude a portion of capital gains from the sale of a primary residence: up to $250,000 for single filers and $500,000 for married couples filing jointly. To qualify for this exclusion, you must have owned and used the home as your principal residence for at least two of the five years preceding the sale. If your gain exceeds these exclusion amounts, the increased cost basis from capital improvements helps to lower the taxable portion of that excess gain.

Keeping Proper Records

Maintaining records for all home improvements is important for tax purposes. These records provide documentation for the increased cost basis to the IRS, especially if your tax return is questioned. Without proper documentation, you may not fully realize the tax benefits of capital improvements.

Keep detailed records, including invoices, receipts, cancelled checks, and contracts for materials and labor. Before-and-after photos and relevant permits also serve as valuable evidence. Organize these documents in a dedicated file or store them digitally in a secure location. These records should be retained for as long as you own the home, plus at least three years after filing the tax return for the year in which you sell the home.

Special Considerations for Medical Purposes

In specific circumstances, a swimming pool can be considered a medical expense, allowing for a tax deduction. This is a narrow exception with strict conditions. To qualify, the pool must be installed primarily for the medical care of the taxpayer, spouse, or dependent, and prescribed by a doctor for a specific medical condition. Qualifying conditions include chronic pain, musculoskeletal diseases, or those requiring physical therapy.

Only the expenditure amount exceeding any increase in the home’s value due to the pool can be included as a medical expense. For example, if a pool costs $80,000 to build but increases the home’s value by $30,000, only the $50,000 difference may be considered for the deduction. The deduction is also subject to the adjusted gross income (AGI) threshold for medical expenses; only the portion exceeding 7.5% of your AGI can be deducted. The pool must be used solely for the prescribed medical treatment, not for general health, recreation, or if publicly available facilities serve the same purpose.