Many homeowners have home improvement projects in mind when deciding to paint their homes. The question is, does the painting project qualify as a repair or an improvement? This is important because of the tax benefits that come with home improvements.
Repainting is one option to freshen up your property before selling it, and it is less expensive than replacing your flooring or redesigning your kitchen. Even if you do all of the work yourself, painting a full house’s interior may be costly. You’d undoubtedly feel a lot better about your new paint job if you could use that money to raise your property’s cost basis and so reduce the profit on which you’d have to pay capital gains tax when you sell it. However, the Internal Revenue Service has stringent regulations concerning which upgrades add to your cost basis.
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Your Property’s Cost Basis
Cost basis is the original amount you paid for a property plus all of the expenses associated with the purchase. Your cost basis can include expenses such as commissions, legal fees, and closing costs. It doesn’t include the improvements you make to the property, such as remodeling and refurbishing.
What is an Improvement?
Any work done to increase the value of your property, extend its life span, or adapt it to new purposes is considered an improvement. Some costs are unmistakably improvements. For example, replacing an old roof with a brand new one is certainly an improvement that should be capitalized and depreciated. The expenses of upgrading a complete structure, altering a facility for a different use, or repairing or rebuilding a piece of machinery are also classified as improvements. However, the distinction between repairs and enhancements is not as obvious in many other circumstances.
What are Repairs?
Repairs and maintenance are often one-time costs spent to ensure your home is comfortable, inhabitable, and in good condition. In general, the phrase refers to painting, repairing roof leaks, patching up floor cracks, and replacing a worn-out or broken air conditioning system component.
What is the Difference Between a Repair and an Improvement?
As a result of the gray areas, the difference between repairs and improvements is not always apparent, and people tend to mix it up. The distinction between a “repair” and an “improvement” is more than just semantics for tax reasons.
Here’s a general rule of thumb: Lifespan and value are frequently used to assess whether a cost is a repair or a capitalized expense. A repair maintains equipment or buildings operating at the same level for several years. On the other hand, any activity that improves the physical space or greatly extends the lifespan of the equipment to the point of making the asset worth more is classified as an improvement. An improvement’s cost is typically capitalized and depreciated over some time.
Is Painting an Improvement or Maintenance?
As earlier stated, improvements you make to maintain the property but that do not significantly affect or enhance the worth of the property do not qualify as charges you can deduct from your basis. Painting is typically included under this category. Yes, painting improves the appearance of your property and may raise your chances of selling it, but then, the rooms were most likely painted before the recent paintwork.
The painting did not increase the property’s value, nor did it significantly enhance it or enable it to be used for another purpose. However, suppose the painting is directly benefited or incurred as part of a larger project that constitutes a capital improvement to the building structure. In that case, the cost of the painting is capitalized as part of the capital improvement.
Is Interior Painting Tax Deductible?
Many people consider interior painting to be a capital purchase. The Internal Revenue Service (IRS) doesn’t share this view. The IRS considers interior painting a personal expense, which means that it can’t be deducted from taxes like a capital purchase. So, if you’re looking for a tax deduction, you’re going to have to make sure that your painting is purely cosmetic.
The services must meet several criteria for paintwork to qualify as a deduction on tax forms. First of all, the house in question must be used as your principal place of residence for more than half of the year. Secondly, the painting should be considered “necessary” and not “decorative.”
According to the IRS, qualifying expenses include things like:
⦁ Repainting your home if you experience an increase in utility costs due to faulty paint
⦁ Painting trim and molding that are damaged or peeling
⦁ Painting woodwork before installing paneling
⦁ Repairing damage caused by water infiltration through peeling paint
Exceptions to the Rule
However, there are a few cases where the expense of painting might be considered an addition to the property value. If you renovate your kitchen, for example, and the paintwork is included in the redesign, you do not have to deduct the painting element of the project from the amount you add to your cost base.
Also, if your house is destroyed in a fire or flood and you repaint the inside as part of the repairs to restore the property’s worth and make it livable again, the IRS enables you to deduct the expense of painting from your cost basis.
What if it’s a Rental Property?
Repairs and renovations to your rental property will undoubtedly be required. You can make alterations ranging from modest and affordable to substantial and expensive.
Fortunately, there are the expenditures of rental property upkeep, which are also tax-deductible. This means you may deduct repairs and renovations to your rental property from your taxes, making them a bit less of a financial burden. Painting the interior of your rental property falls under this category.
However, there’s a considerable difference between repairs and improvements made on your rental property when it comes to taxes. While you may deduct the entire cost of repairs on your current year’s taxes, you can’t deduct the total cost of an improvement right away. You’ll have to take it one step at a time.