How to Deduct a Home Improvement

Recent tax law changes have created a lot of confusion about what is a home improvement and how a family child care provider can deduct such an expense.

Before we explain how to deduct a home improvement, providers should first go through these steps:

• Does the item cost $2,500 or less?

• Is the item a repair or a home improvement?

• In general, a home improvement is depreciated over 39 years. However, if the home improvement qualifies for one of two exceptions, it can be deducted in one year.

Does the item cost $2,500 or less?

If it costs $2,500 or less it can be deducted in one year and does not have to be depreciated. Claim such expenses on Schedule C, under Other Expenses. If you use it 100% for your business you can deduct 100% of the expense. If it is also used by your family, apply your Time-Space Percentage. If it costs more than $2,500 go to the next step below.

Is the item a repair or a home improvement?

A repair is something that does not materially add to the value of your home. Traditionally, a repair was fixing broken glass, painting, and other general household repairs. However, Treasury Regulation Section 1.263(a) greatly expanded the definition of a repair. It says that if you replace a significant or substantial portion of a major component of your home, you must depreciate it over 39 years. If not, you can treat it as a repair and deduct it in one year, regardless of the cost.

What does this mean? If you replace the shingles on your roof, it's a repair, If you replace the boards underneath, that's an improvement that must be depreciated over 39 years. If you replace less than half of your windows or doors, or flooring, that's a repair. If you remodel one of your three bathrooms, it's a repair. Replacing one of two bathrooms is an improvement. So, basically, if you replace less than half of a major component of your home, it's a repair.

So, what is a home improvement?

A home improvement is something that is attached to your home and results in the betterment of your home. Examples would be: a new deck, new furnace, new central air condition unit, new roof, home addition, remodeling a kitchen, or building a new garage.

In summary, if it costs $2,500 or less, or if it's a repair, deduct it in one year. If it's a home improvement, depreciate it over 39 years on Form 4562.

One exception

Even if you have a home improvement, it may be possible to deduct it in one year if you meet this exception:

Safe Harbor for Small Taxpayers exception: If your home improvements and repairs for 2018 are less than 2% of the purchase price of your home, you can deduct the business portion of the improvement in one year. This rule is a little complicated.

Was this clear? I hope so. These rules can get complicated. If you are using online software such as TurboTax, H&R Block or TaxAct, it can be very confusing to follow how they treat a home improvement. If you use a tax professional, don't let him/her depreciate your home improvement over 39 years unless you are convinced that it's not a repair and you don't qualify for the exception.

Tom Copeland - www.tomcopelandblog.com

Image credit: https://commons.wikimedia.org/wiki/File:Lower_Level_Paver_Deck.JPG

My book Family Child Care Tax Workbook and Organizer goes into greater detail on how to handle improvements and repairs.