How to determine if your home renovation is a capital improvement

by Lee Joseph 11/30/2022

Whether you're planning to flip a property or simply want to improve the value of your home, it's a good idea to prioritize projects that count as capital improvements. A capital improvement to your home is an expense you can claim on your taxes after you sell the property.

But what exactly does capital improvement mean? Here are some common questions and answers:


What's the difference between capital improvements & repairs?

Not all home improvement projects count as capital improvements. An investment in the construction of new buildings is considered an investment of significant value and an improvement of property. This usually involves building or remodeling the structure.

In contrast, repairs are either preventative or routine maintenance. This would include work to fix or replace an existing asset.


Capital improvement examples

Here are some of the most common examples of capital improvement projects:


  • Building an addition to your home.
  • Adding heating & air conditioning systems.
  • Adding a permanent fixture to increase accessibility & safety, such as ramps or handrails.
  • Plumbing additions & improvements like septic tanks or soft-water filters.

How a capital improvement works

Capital improvements generally increase the price of an asset, but also extend its useful life. Under IRS standards, capital improvements must last at least one year after completion. Although the scope of capital improvements varies between individuals, and large property owners make capital improvements.


How do people finance capital home improvements?

A common way to finance a capital improvement project is to opt for cash out refinancing. Cash out refinance allows you to replace your existing mortgage loan with a larger one and take out the difference as cash.

Home equity loans and home equity lines of credit (HELOC) are also used for capital improvements. A home equity loan is ideal for a one-time major project, while a HELOC can be beneficial if you're planning multiple ongoing projects of varying expense.


Can maintenance jobs turn into capital improvements?

While there is a difference between regular maintenance and capital improvements, one can turn into the other. For example, you might have a leak and hire a plumbing service to investigate and resolve the issue. In evaluating the problem, you find extensive damage requiring replacement of large sections of plumbing.

While repairs and maintenance were originally meant to restore your plumbing's existing function, replacing damaged pipes will extend the useful life of the system and home.

To find out if your planned projects are considered capital improvements, consult a home inspector or tax professional. The more you know about the potential benefits of your hard work and money, the better decisions you can make for your home.


About the Author
Author

Lee Joseph

  

This is my 37th year in real estate and I love what I do! I enjoy making the American Dream of home ownership a reality. I believe in always being on the cutting edge of anything new in my industry and as a result, hold the national designations of ABR (Accredited Buyer Rep), CRS (Certified Residential Specialist), and SRES (Senior Residential Specialist). I received the Natalie Quinlan Distinguished Service Award in 2017, Realtor of the Year Award in 2013 and the Realtors Choice Award in 2010. I currently hold the Coldwell Banker President's Elite Award and the Central Massachusetts Association of Realtors Diamond Level Award. I believe in giving back to our industry and serve on many committees for RACM including Professional Standards (which I have also Chaired), Nominating Committee and Strategic Planning. I am currently President Elect and a member of the Executive Team. In the community, I am on the Board of Directors for Boys and Girls Club and Chair of Board Development Committee. I also enjoy supporting the performing arts and especially the Hanover Theatre. As Founding Members, my husband and I sat on various committees and enjoy attending as many performances as we can. I am a Shrewsbury resident and have raised two daughters who have enjoyed and benefited from an education from the Shrewsbury Public School system. I practice seller and buyer representation, new construction, and relocation.

Lee Joseph, ABR, CRS & SRES