What Are Fixing-up Expenses?
Fixing-up expenses is a common term for any repair-related costs that a homeowner incurs while preparing their home for sale, such as replacing a broken window or repainting the kitchen. A fixing-up expense is different from a capital improvement that increases the value of a home, such as the addition of a new deck or swimming pool. Fixing-up expenses are not tax-deductible either at the time or as part of the home-selling process, under the Taxpayer Relief Act of 1997.
Key Takeaways
- Fixing-up expenses are costs related to repairs done while preparing a home for sale.
- Such expenses are not tax-deductible as part of the home-selling process.
- Fixing-up expenses are unlike capital improvements, which increase the cost basis of a home and can save homeowners on their taxes.
Understanding Fixing-up Expenses
Fixing-up expenses are another name for run-of-the-mill home repairs done in the process of getting a home ready for sale. The Internal Revenue Service (IRS) considers fixing-up expenses to be any repair necessary to keep a home in good condition. Examples of fixing-up expenses include repairing leaks, replacing broken door hardware, painting, or any improvements with a life expectancy of less than a year.
However, the IRS notes that items that would typically be considered fixing-up expenses and thus not tax-deductible can be added to the home's cost basis if the repairs were part of an larger home remodeling. For example, this might apply if a homeowner restores a home to its previous condition after it was severely damaged in a hurricane.
Expenses related to repairing or fixing up primary residences are not tax-deductible. However, repairs can be a tax-deductible expense each year for owned rental properties.
Fixing-up Expense vs. Capital Improvements
The IRS draws a line between fixing-up expenses and capital improvements.
It defines a capital improvement as something that makes a permanent structural change or restores some aspect of a property that will either enhance the property's overall value, increase its useful life, or adapt it to new uses. To qualify as capital improvements, such alterations must have a life expectancy of more than one year at the time the owner makes them.
Examples of capital improvements can include:
- Adding a bedroom, bathroom, or deck.
- Adding new built-in appliances, wall-to-wall carpeting, or flooring.
- Improvements to a home's exterior, such as replacing the roof, siding, or storm windows.
Capital improvements are not tax-deductible but can save the home seller money by adding to the cost basis of their home. Cost basis represents the amount of money that the homeowner has invested in the home, including both its initial purchase price and any qualifying improvements. Home sellers are taxed (if at all) on the difference between the home's selling price and their cost basis in it.
For an improvement to qualify as an increase to a home's cost basis, it must be in place at the time of the home sale. The capital improvement must also become part of the property or be permanently added to the property so that the removal of it would cause significant damage to the property itself.
In sum, while repairs may be necessary to prepare a home for sale—and could increase its value to the extent that the same home in a state of disrepair would sell for less—they are not deductible under current law.
The Home Sale Tax Exclusion
Current federal tax law allows single homeowners to exclude the first $250,000 ($500,000 for married couples who file their taxes jointly) of any capital gain they make when selling their homes. The exclusion applies if homeowners have owned and used the home as their primary residence for at least two of the last five years before the sale. Home sellers who don't meet that test may, in some instances, qualify for a partial exclusion.
Taxpayers can use the federal home sale exclusion multiple times in their lives but are generally limited to once every two years. In addition, the exclusion only applies to the taxpayer's primary residence. Taxpayers who own a second home and decide to sell it will be taxed on the full amount of any capital gain.
The capital gain on a home sale is calculated by subtracting the home's cost basis from the net selling price. Net selling price is not how much the buyer paid, but the amount that the seller actually receives from the sale after closing costs are accounted for.
Are Fixing-up Expenses Tax-Deductible?
No, fixing-up expenses, such as ordinary home repairs, are not tax-deductible either in the year they are incurred or at the time of a home sale, except in the case of rental properties. However, the IRS states that if the repairs are part of an overall remodeling, the expense can increase your cost basis in the home, which reduces your potential capital gains tax when you sell the property.
What Is the Difference Between Capital Improvement and Repairs?
A fixing-up expense is a repair or improvement with a life expectancy of less than a year. A capital improvement is a project with a life expectancy of more than one year, such as adding new flooring or an addition, that adds to the value of the home.
Are Fixing-up Expenses Tax-Deductible for Rental Properties?
Typically, if the expense is for a repair intended to keep the property in good working condition and does not add to the property's value, it is tax-deductible. Otherwise it may be counted as a capital improvement.
The Bottom Line
Fixing-up expenses are repairs done in the process of getting a home ready for sale. Replacing broken fixtures, patching a crack in a wall, or improvements to a home that have a life expectancy of less than a year are considered fixing-up expenses. Capital improvements that add longer lasting value to the home can be added to the home's cost basis, reducing the possible capital gains tax when the home is sold. Since tax laws change frequently, it's worth consulting a tax advisor before determining whether a fixing-up expense is tax-deductible.
