What Are Fixing-up Expenses?
Fixing-up expenses are any repair-related expenditures an individual has incurred during the process of preparing their home for sale, such as replacing broken windows or painting. A fixing-up expense is different from capital improvements, which increase the value of a home, such as the addition of a new room or swimming pool.
Fixing-up expenses are not tax-deductible as part of the home-selling process per the Taxpayer Relief Act of 1997.
Key Takeaways
- Fixing-up expenses are costs related to repairs done while preparing a home for sale or rental.
- Fixing-up expenses are not tax-deductible as part of the home-selling process per the Taxpayer Relief Act of 1997.
- Fixing-up expenses are unlike capital improvements, which increase the cost basis of a home.
Understanding Fixing-up Expenses
Fixing-up expenses are considered run-of-the-mill home repairs done in the process of getting a home ready for sale. The Internal Revenue Service (IRS) defines fixing-up expenses as any repair necessary to keep a home in good condition. Examples of fixing-up expenses include fixing leaks, replacing broken hardware, painting, or any improvements with a life expectancy of less than a year.
Expenses related to repairing or fixing up primary residences are not tax-deductible. However, the repairs are tax-deductible for owned rental properties.
The IRS specifies that items that would typically be considered fixing-up expenses and thus not tax-deductible are exempt if the repairs were part of an entire home remodeling. For example, this might apply if a homeowner restores a home to its previous condition after a casualty.
Fixing-up Expense vs. Capital Improvements
Typically, when a homeowners want to make major improvements to their home, they would contact a mortgage lender to take out a loan or home equity line of credit (HELOC). If these improvements added to the value of the home, they would be considered a capital improvement.
The IRS defines a capital improvement as adding a permanent structural change or restoring 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, alterations must have a life expectancy of more than one year at the time the owner makes them.
Examples of capital improvements 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
For the improvement to qualify as a cost basis increase, it must be in place at the time of the home sale. A 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.
The distinguishing difference between fixing-up expenses and capital improvements depends on whether a repair increases a property’s value. Repairs necessary to keep a home in good condition get classified as fixing-up expenses unless theyadd valueto the property.
Special Considerations
The Taxpayer Relief Act of 1997 allows single homeowners to exclude the first $250,000 ($500,000 if married) of the capital gain when selling their homes. The exclusion applies if homeowners have owned and used the home as a primary residence for two of the last five years before the sale. The capital gain is calculated by subtracting the home's cost basis from the net selling price.
With this act, capital improvements are allowed to increase the cost basis of a home, which can lower the capital gains tax for homeowners. The costs of renovations or repair-type work done as part of an extensive remodeling or restoration job can be added to the home's cost basis for tax purposes. For example, replacing broken window panes is a repair, but replacing the same window as part of a project of replacing all the windows in your home is an improvement.
Are Fixing-up Expenses Tax Deductible?
Fixing-up expenses, as part of the home-selling process, are not tax-deductible. Fixing-up expenses include replacing broken windows or painting. However, the IRS states that if the repairs are part of an overall remodeling, the cost can increase your basis or property cost, which reduces your capital gains tax when the property is sold.
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, such as fixing leaks or painting. A capital improvement is a repair with a life expectancy of more than one year, such as adding new flooring or an addition.
Are Fixing-up Expenses Tax Deductible for Rental Properties?
Typically, if the expense is a repair cost designed to keep the property in good working condition and does not add to the property's value, it is tax-deductible.
The Bottom Line
Fixing-up expenses are repairs done in the process of getting a home ready for sale and are necessary to keep a home in good condition. Replacing broken hardware, painting, or improvements to a home that have a life expectancy of less than a year are considered fixing up expenses. As a result, fixing-up expenses are not tax-deductible. However, expenses that are exempt from the non-deductible policy are costs incurred as part of a major remodeling project. Since tax laws change frequently, please consult a tax advisor before determining whether a fixing-up expense is tax-deductible.
