What Home Improvements Are Tax Deductible When Selling Per IRS?

When selling your home, the profit you make is potentially subject to capital gains tax. The Internal Revenue Service (IRS) allows homeowners to reduce this taxable gain by accounting for the cost of certain home improvements. These qualifying expenses can lower your tax obligation. The process involves distinguishing between simple repairs and substantial improvements, tracking these costs, and correctly reporting them when you file your taxes after the sale.

Defining Capital Improvements for Tax Purposes

The IRS makes a clear distinction between a capital improvement and a repair, which directly impacts your taxes when you sell your home. A capital improvement is a project that adds material value to your property, prolongs its useful life, or adapts it for new uses. These are not minor fixes but substantial investments in the home itself.

In contrast, a repair simply maintains the home’s current condition. These are routine maintenance tasks that keep the property in good working order but do not add to its value or extend its life in a meaningful way. For example, fixing a leaky faucet, repainting a single room, or replacing a broken window pane are all considered repairs.

Qualifying capital improvements involve major additions or system upgrades. Examples include:

• Adding a new bedroom or bathroom
• Finishing a basement
• Building a new deck
• Installing a new HVAC unit, a new roof, or a new septic system
• Paving a driveway
• Installing a fence
• Undertaking extensive landscaping that enhances the property’s value

Some projects can be nuanced. For instance, while repainting your entire house as part of a larger renovation project might be included, simply painting one room is a repair. The key is whether the work was part of a broader project that improved the home. If an activity is part of a comprehensive remodel, its cost may be includable, whereas the same activity done on its own would be a non-deductible repair.

How Improvements Affect Your Home’s Cost Basis

The financial benefit of capital improvements is realized by adjusting your home’s cost basis. The initial cost basis is what you paid for the property, including certain purchase-related expenses. When you make a qualifying capital improvement, you add the cost of that project to your initial basis, creating an “adjusted cost basis.” This higher basis reduces the amount of profit, or capital gain, you have to report.

For example, if you purchased your home for $325,000 and spent $75,000 on a qualifying kitchen remodel, your adjusted cost basis becomes $400,000. If you later sell the home for $600,000, your potential gain is the sale price minus the adjusted basis ($600,000 – $400,000), resulting in a $200,000 gain. Without the improvement, your gain would have been calculated from the original $325,000 basis, leading to a higher taxable amount.

This adjustment is important due to the home sale exclusion. The tax code allows most homeowners to exclude a portion of the gain from their income—up to $250,000 for single filers and $500,000 for married couples filing jointly. For those with gains exceeding the exclusion amount or for individuals who do not meet the eligibility requirements, accurately calculating the adjusted basis is a direct way to lower the final tax bill.

Required Documentation for Home Improvements

To claim the costs of capital improvements, you must maintain detailed records. The IRS requires proof of these expenses, and without proper documentation, you may not be able to adjust your home’s cost basis. These records serve as the evidence to support your tax calculations in the event of an audit.

Your documentation should include a variety of records for each project. These records can include:

• Contracts with builders, architects, and other professionals
• Invoices detailing the work performed and materials purchased
• Proof of payment, such as canceled checks, bank statements, and credit card statements
• Building permits for any work that required municipal approval

Organizing these documents systematically is a good practice. File records by project and date them clearly. As supplementary evidence, before-and-after photographs can be effective in demonstrating the scope of an improvement. These records should be kept for at least three years after you file the tax return that reports the home sale.

Calculating and Reporting the Home Sale

After gathering your documentation and identifying qualifying improvements, the final step is to report the sale to the IRS. You will use your final adjusted cost basis, which includes the cost of improvements, to complete the necessary tax forms accurately.

The sale of your home is reported on IRS Form 8949, “Sales and Other Dispositions of Capital Assets.” On this form, you will provide the property’s description, the date you acquired it, and the date you sold it. In column (d), you will enter the gross proceeds from the sale, and in column (e), you will enter the adjusted cost basis.

The gain or loss calculated on Form 8949 is then transferred to Schedule D, “Capital Gains and Losses.” This schedule consolidates your capital transactions for the year. If you qualify for the home sale exclusion, you will also account for that on this form, which can reduce your taxable gain to zero.