Last week we explained how home improvements can provide homeowners with tax benefits when the home is sold because the cost is added to the home’s tax basis. In contrast, home repairs (there is an important distinction) provide no tax benefits at all.
However, if you understand and apply the rules, you can turn repairs into improvements for tax purposes.
Under what the Internal Revenue Service calls the "general plan of improvement" rule, an expense that is incurred as part of an overall plan of improvement, rehabilitation, or modernization constitutes an improvement — even though the same expense, standing alone, would be a repair.
For example, patching a roof would ordinarily constitute a repair, but it can be treated as an improvement if it is part of a general plan of improvement.
You have a general plan of improvement when you undertake a number of repairs at about the same time, or consecutively, to achieve an overall goal: remodeling, rehabilitating, or modernizing your property.
The classic example of a general plan of improvement is when a person buys a fixer home, draws up detailed plans for rehabilitating it, and hires a contractor to do all the work. However, it is not necessary to have a formal, written document outlining your plan of improvement or renovation.
And you don’t need to hire a building contractor to do the work. The IRS looks at all of the surrounding facts and circumstances, including the purpose, nature, extent, and value of the work done.
To determine if an expense is a repair or part of a general plan of improvement, you can’t look at it in isolation. You must consider whether the work is being done alone or in conjunction with other items.
In one well-known case, for example, Clair and Ruth Cobleigh purchased a dilapidated four-unit apartment building in Lincoln, Neb. They decided to fix up the building and hired a contractor who performed the following work over a two-year period:
- Part of the building was painted;
- The roof was patched where needed;
- Broken tiles were replaced;
- A new outside stairway was installed;
- A new cement floor was put in the basement;
- Screen doors and gutters were replaced;
- New doors were installed;
- New floor joists and flooring were placed in the first floor;
- New countertops were placed in each apartment kitchen; and
- New sinks and lavatories were installed in some of the apartments.
The IRS found that all these individual expenses, which would have been repairs if viewed in isolation, were improvements because they were all undertaken as part of a general plan of improvement for the building.
Each expense was part of an "overall plan to recondition a dilapidated building into an efficient business building," and each expense "was an integral part of the overall permanent betterment of the building" (Cobleigh, tax court memo 1956-261).
Here are some ways you can help turn repairs into part of a general plan of improvement:
- Save up your repairs and have them all done at about the same time;
- Hire the same contractor or repair person to do the work;
- Have the contractor or repairperson include all the work on a single bill or invoice;
- Have the contractor or repairperson to label the work performed as an "improvement" in a contract or invoice; and
- Create a written plan showing how you intend to remodel or rehabilitate your building.