This post will discuss repairs and improvements to investment properties and your own home. If you have already completed work on the property, you should understand how to classify that work for tax purposes for 2014. If you plan on completing work in 2015, you may want to consider what projects to undertake to maximize the return on your investment.
The Basics of Basis
A short introduction to the concept of basis is in order. Basis is the amount a property is worth for tax purposes. A property’s basis can change through improvements, depreciation, and a handful of other means. When property is sold, the increase or decrease in value for tax purposes is determined by subtracting the property’s basis on the date of sale from the purchase price. The larger the basis, the smaller the profit will be, thereby reducing the tax liability. If a home is sold for less than its basis, a loss will occur. Losses incurred on the sale of a personal residence are not deductible, but those losses are deductible for investment properties.
For investment properties, improvements increase your basis – repairs do not. However, repairs are still tax For investment properties, improvements increase your basis – repairs do not. However, repairs are still tax deductible as costs of doing business. For longer-held investment properties, you want to make improvements to increase your basis in order to reduce taxes on the sale and increase the overall sales price. For shorter-held investment properties, sticking with repairs and taking the deductions may prove to be a better strategy.
Additionally, a quick note on purchasing an investment property: you can increase your basis by having the seller cover loan costs and other non-deductible expenses (such as legal fees, surveys, etc) and then having the seller increase the purchase price. This will give you (the buyer) a higher basis from the beginning.
When you own your home, improvements increase your basis – repairs do nothing (for tax purposes). So you want to do everything possible to ensure that any repairs can be classified as improvements. For example, fixing a door handle is a simple repair and does not increase your basis; however, buying and installing a new door handle could likely be classified as an improvement.
Understanding the concept of basis and how changes to property affect that basis is important for every owner. By properly adjusting your basis – and keeping records of the adjustments – you can ensure an accurate calculation when filing taxes and selling the property.
Because each property owner’s situation is unique, consulting a knowledgeable attorney or tax professional is recommended.