, Answering FAQ'sTurboTax Employee
Home improvements only come into play when you sell your home. This is because major improvements add to the cost basis of your home, which is then subtracted from the home's sale price, reducing any gain or profit. More information is in IRS Publication 523, Selling Your Home.
For all practical purposes, major home improvements don't have any effect on your taxes unless your home's value has increased substantially since its purchase. But if you feel that major improvements might help you avoid capital gains tax down the road, you should keep good records in case you need to justify them to the IRS.
Let's find out what the IRS means by major improvement:
Major improvements, defined
- Add materially to the value of your home; or
- Prolong your home's useful life significantly; or
- Adapt your home to new uses.
- Adding a room, garage, deck, paved driveway, or porch
- Upgrading a roof, water heater, or wall-to-wall carpeting
- Installing an upgraded central air or heating system
- Rewiring or replumbing your home to updated codes
- Adding a built-in pool, gazebo, or hardscaping
- Making your home fully handicap-accessible.
Major improvements do not include replacement work to maintain the home. While we're at it, here are some common home projects that don't qualify as major improvements:
- Small-scale improvements such as painting a room, replacing a toilet, and re-tiling or re-carpeting the floor,
- Repairs such as fixing a leak, replastering a cracked wall, or replacing a window,
- A like-quality replacement washer, dryer, refrigerator, or other appliance,
- Small landscaping improvements like planting flowers, replacing shrubs or a tree,
- Adding a ramp or rail for handicap access.
When a number of small projects are combined into a large project, such as extensive remodeling or restoration of the home or a room, the entire job can be considered an improvement. Also, if you have a casualty and the home is damaged, you can increase your basis (value) by the amount you spend on repairs that restore the property to its pre-casualty condition.
Entering major improvements in TurboTax
As we mentioned above, major improvement expenditures only come into play when you sell your home. Here's how to enter a home sale in TurboTax:
- Select Federal Taxes (Personal in Home & Business edition).
In Online TurboTax, click the bars at the upper left corner to show Federal Taxes on the selection list; enlarge the screen if needed to show the left side selection list.
- Select Wages & Income, and in the next screen, click I'll choose what I work on.
- Scroll down the Your Income Summary screen to the Less Common Income group.
- Click Start/Update next to the Sale of Home (gain or loss) topic.
- Proceed through the home sale interview.
When you get to the Tell Us About the Purchase of Your Home screen, include the cost of any home improvements in the Adjusted Cost Basis field,
Or click the Easyguide option to let TurboTax figure out your cost basis for you.