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.
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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:
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.
Here are some examples of tax-deductible home improvements:
You can track these expenses using our home office expense worksheet.
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:
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.
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.
Read more on limitations for the home office deduction here.
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.
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.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?