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. This type of 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 no longer tax-deductible as part of the home-selling process with the passage of the Taxpayer Relief Act of 1997.
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.
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 remodeling of the home. This primarily applies in situations where a homeowner has to restore a home to its previous condition after a casualty.
Fixing-up Expense vs. Capital Improvements
The IRS defines a capital improvement as the addition of a permanent structural change or the restoration of some aspect of a property that will either enhance the property's overall value, increase its useful life, or adapt it to new uses. In order 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 must 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 upon whether or not a repair increases a property’s value. Repairs that are necessary to keep a home in good condition get classified as fixing-up expenses unless they add value to the property.
The Taxpayer Relief Act of 1997 allows single homeowners to exclude the first $250,000 ($500,000 if married) of the capital gain from the sale of 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 cost basis of the home 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 cost basis of the home 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 counts as an improvement.