If you're like most homeowners, you probably hate having to pay for things like broken windows, frayed wires, and faulty plumbing. It's only natural, then, that you'd want to know if these expenses are tax-deductible.
Unfortunately, if your home serves purely as a personal residence, then you can not deduct your home repairs. The IRS allows you to write off your home repair costs only if you rent out part of your home or if you qualify for the home office tax deduction.
Note: If you want to track all your tax-deductible home office expenses, try Bonsai Tax. Our app could scan your bank/credit card statements to uncover potential tax deductions. In fact, users typically save $5,600 from their tax bill. Try a 7-day free trial here.
Home Improvements VS. Home Repairs
Before you start any renovations on your house or rental property, make sure you're aware of the distinction between a home improvement and a home repair -- the difference will be crucial come tax time.
Repairs bring your home back to its original state. For example, replacing a doorknob in order to fix a faulty lock would be considered a repair.
Repairs are needed maintenance to keep your property habitable and operational. To the IRS, repairs don't add "significant value" to your property and don't prolong its life.
Generally, when you repair your home, you help return it to its previous good condition -- therefore, your newly-repaired home can not be considered improved upon.
Also, note that when you replace a broken appliance, the IRS considers this a repair rather than a replacement.
That said, home repairs can include:
Repainting a wall
Repairing a roof
Replacing a window
Fixing a broken drain pipe
Replacing a doorknob or lockset
In contrast, home improvements add value to your property and prolong the useful life of your home. Installing a new water heater, for example, would be considered an improvement.
Generally, when you improve your home, you help increase its resale value, and you can deduct the costs of these improvements. There's a catch, though. You can only claim these tax deductions the year you sell your home.
Home Improvements Tax Deductible Expenses
Here are some examples of tax-deductible home improvements:
Adding an extra bedroom to your house
Converting a garage into a family room or playroom
Putting up a fence around your backyard or pool
Adding central heating and air conditioning systems to a previously-unconditioned home
Installing solar panels
Installing energy-efficient equipment to get a tax credit
Now that you understand the difference between a capital improvement and a home repair, let's look at the circumstances in which you can claim a deduction for home repairs. As we've mentioned earlier, you can only claim home repair tax deductions if you:
The home office deduction allows homeowners to get reimbursed for their home office and reduce their taxable income by deducting expenses related to the part of the house they use exclusively for business. These types of expenses can include mortgage interest, property taxes, insurance premiums, repairs, etc.
The tax deduction is available to both homeowners and renters, and it may be claimed for any home in which you reside: a single-family house, an apartment, a condo, or a houseboat. It can't be used for a hotel or other short-term accommodation.
To claim the deduction, you need to either be self-employed, a gig worker, a freelancer, or an independent contractor. Unfortunately, the deduction isn't available for workers who receive W-2s from their employers every tax season. Even W-2 employees who work from home aren't eligible for this deduction. Make sure you qualify because you don't want to risk a home office audit.
That said, to qualify for the home office deduction, your home must meet certain requirements, which include:
The “exclusive and regular use” requirement
This requirement states that the home office must be used solely for business purposes. If part of your home office is also used as a residence, even occasionally, you can't claim this deduction.
For instance, let's say you set aside one room in your home for your freelance writing business. If you allow your children to use the room to complete their school assignments, then you likely won't qualify for the home office deduction.
The “principal place of business” requirement
Th principal place of business requirement states that your home office has to be the place where you engage in your business activities regularly and full-time. This is where you manage your business, meet clients and customers, deal with finances, conduct research, or perform any other business duties.
You can't claim a home office deduction if your home office is merely a place where you keep books and records.
With that said, if you make any repairs exclusively to your home office -- rather than your entire home -- you can write off 100% of the cost you incurred. For instance, let's say you use one of your rooms as a home office. You have a broken window and you need it replaced. The money you'll use to replace this window is 100% deductible when you file your returns.
In contrast, any repairs to your entire home aren't 100% deductible -- the percentage of costs you'll deduct depends on the percentage of home-office use. Let's say you use 30% of your home for business purposes. If you decide to repaint your entire home, then you'll deduct only 30% of the costs you incurred.
Home improvements are tax deductible, too. Similarly to home repairs, home improvements need to be made only on the parts of your home that you use for business.
The difference, however, is that you need to deduct home improvements over time with depreciation. The IRS allows you to deduct home repairs within the year they're made, as they consider repairs necessary for the upkeep of your business. Home improvements, on the other hand, are considered capital improvements as they add value to your home over time, so you may have to depreciate the expenses you incur over a period of years.
For instance, let's say you incur a $1,000 roofing expense this year. If you classify this $1,000 as a home repair, you can deduct the $1,000 this tax season. If you classify it as a home improvement, you may have to depreciate it over a period of 27.5 years, and you might only claim a $35 write-off this year. But on the bright side, you may earn a tax break when you eventually sell the home.
If you rent out one of the rooms in your home, the IRS requires you to report this income and allows you to deduct expenses related to the rented room only. The tax rules you have to follow are similar to the ones landlords have to adhere to when they rent out entire properties.
When renting out part of your home, you need to divide certain expenses between the portion of the property that is used for business and the portion of the property that is used for personal reasons, as though you had two separate properties.
If you use the money exclusively on the rental part of your home, then you don't have to divide the expenses -- you can deduct the entire amount. For instance, let's say you're renting out one of your spare rooms for $1,000 per month. If you pay $500 per month in tax-deductible costs -- such as mortgage interest or repairs -- then you can deduct the entire cost of $500 from your rental income.
On the other hand, if you used any money for repairs that benefit the entire property -- such as a new roof or plumbing repairs -- then you have to divide these expenses between the business and personal portions of your home. Let's say that 5% of your home was used for business purposes throughout the year, and during that time, you incurred $1,000 in tax-deductible costs related to the entire property. You'd then be able to deduct only $50 of your expenses from your tax bill.
Bottom Line For Home Repair Tax Deductions
Home repairs are often overlooked as potential tax deductions. The truth is that many home repairs are actually deductible and offer tax benefits, as long as you meet the conditions we've explained above. If you need to repair your roof, fix your air conditioner, or replace the plumbing in your kitchen, these repair costs may be deductible to you come tax time.
As a small business owner, understanding the various IRS-required forms for subcontractors is absolutely essential to remain compliant. This guide will let you know all about creating 1099 forms and what types of forms you may need..