If you paid for any serious roof repair last year, you may have attempted to deduct it from your annual taxes. But are roof repairs tax deductible? It’s important to understand the distinctions between repairs and improvements and how they’re treated when filing taxes. Read on to learn the deduction differences.
Defining home improvements
So, what exactly is considered a "home improvement?" Well, a home improvement is any general update to a home that contributes to its usefulness or adds to its life.
A home improvement isn't just a short-term fix; it adds considerable value to a home as the years go by.
Home improvements cost more than general repairs and are usually larger in scope, too.
3 Main Characteristics of a Home Improvement Project
- Adapts an existing space or object for a new use
- Adds new space or objects that were not there before
- Upgrades an existing space or object
Some of the most common examples of home improvements include...
- Replacing the roof
- Renovating kitchens and bathrooms
- Adding a back porch or deck
- Adding a home addition
- Replacing all the windows
Defining home repairs
The IRS defines home repairs as something that "does not add significant value to the property or extend its life.”
In other words, a home repair is an action done to provide the necessary maintenance to keep the home in working condition and remain hospitable. A repair restores something, like a roof, to its previous working condition; it does not necessarily improve it.
In general, repairs cost less than improvements and can be completed for a reasonable sum.
Some of the most common examples of home repairs are...
- Replacing a few missing roof shingles
- Repainting a room
- Replacing a broken window
- Repairing damaged roof flashing
- Repairing appliances
- Repairs aren’t as extensive as improvements and get the home back to its original state
- Roof Projects Eligible for Tax Credits
- Top 10 Causes for Roof Leaks & How to Fix Them
- How to Quickly Repair a Leaking Roof During Heavy Rains
Deducting home improvements on your taxes
Deducting home improvements is slightly complicated. In short, improvements can be deducted, but you can’t deduct the total value of the improvement the same year the improvement occurred. This is because improvements add value to the home for years to come, not just when they were completed
Home improvements must be capitalized and depreciated according to a depreciation schedule. The cost of the improvement is divided over the useful life of the improvement, and then you’ll be able to place a deduction based on the given year’s expense.
How to deduct a home improvement
For example, let’s say you’ve made a $5,000 improvement to your home. As stated above, it must be deducted over a set depreciation schedule. We’ll use a 10-year model, assume no salvage value, and a straight-line depreciation. This will assure the cost will be spread out evenly over the 10-year period.
Following the formula listed above, $5,000 divided by 10 years means you can claim $500 each year for the next 10 years.
Deducting home repairs on your taxes
Because a repair is done to restore something to its original setting (like a roof), the cost of the repair can be fully deducted in the year it was completed.
How to deduct a home repair
If the cost of repairing a roof is $5,000 (which is a costly repair, but nonetheless), the entire cost can be deducted in the current tax year. If your tax rate is 28%, you can save $1,400 in taxes (5,000 x .28 = 1,400).
So, which is better—improvements or repairs?
The best choice will vary depending on you and your home's needs. A qualified roofer can perform a great roof repair that adds years of functionality, which can also be deducted immediately.
Although a full replacement costs more, it can be deducted each year while also adding great resell value to the home.