WHAT IS Fixing-Up Expenses
Fixing-up expenses are any repair-related expenditures an individual has incurred during the process of preparing their home for sale. This type of expense does not include major home improvements such the addition of a new room or swimming pool. Fixing-up expenses are not deducted outright, but are subtracted from the sale proceeds.
BREAKING DOWN Fixing-Up Expenses
Fixing-up expenses are less significant to tax law following the Taxpayer Relief Act of 1997. Because the act allows homeowners to exclude the first $250,000 of the gain from the sale of their homes, the reduction in sale price from these fixing-up expenses is generally less important than it used to be.
Fixing-Up Expenses vs. Capital Improvement
Though fixing-up costs might have lost some of their tax significance in the 1997 Taxpayer Relief Act, they never included capital improvements, which increase the value of a home.
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; or 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 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.
How to Identify a Fixing-Up Expense
The distinguishing difference between fixing-up expenses and capital repairs 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. For example, if a homeowner fixes a leak or replaces broken hardware those actions are considered fixing-up expenses. But if a homeowner does repairs as part or a larger project, those repairs may indeed be classified as a capital improvement if they add value to the property. For example, if a homeowner had to replace a roof or the windows of a property, those repairs add value to the home and thus are classified as capital improvements.