Capital Improvements and Home Loans

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Capital Improvements and Home Loans

Capital improvements that you make to your home are a tax break. But not every improvement is "capital." To be a capital improvement, the change must be a permanent improvement, prolonging the home’s life or adapting it to a new use. As such, it adds to the value of your home. These improvements are added to the purchase price of the home and used to determine the gain (if any) when the home is sold. In other words, they lower the taxable gain. Because it works in this manner, it is not a tax break in the usual sense of the word.

Here is what qualifies:

• New additions, such as a new room or porch
• Exterior improvements, such as a swimming pool, driveway, or fence
• Plumbing, such as a new water heater
• Heating and air conditioning systems, fireplace, humidifier, or water filtering system
• Improvements that enhance accessibility (such as for the elderly)

Repairs and maintenance to existing property do not count as capital improvements because they do not add anything new to it. This includes, for example, fixing leaks and patching the roof.

Home improvement loan interest

Interest on home loans used to make capital improvements was deductible prior to 2018, but in the current year you paid it.

Home equity loan interest

A home equity loan is a loan that is secured by the equity in your home. You can receive the loan money in a lump sum or as a line of credit. The interest you pay on the loan is tax deductible only in certain situations, however, beginning in 2018. It now applies only to using the loan proceeds to buy, build, or improve the home that secures the loan, as opposed to paying off other debts, buying a car, taking a vacation, paying for education, etc. This restriction is scheduled to end in 2026.

See IRS Publication 936 for more details on capital improvements and loan debts.