Can I Deduct Basement Finishing Expenses?

by Bob Haring, Demand Media

    Finishing a basement is a great way to improve your home. You can create extra living space, a recreational or entertainment area, a home office or a workshop. These improvements can add a lot of value to your home, but unfortunately will also add a lot of expense. A finished basement may improve your quality of life, but it won't be much immediate help on your income taxes.

    You Can't Deduct Most Expenses

    You cannot deduct expenses for finishing your basement in most cases. The Internal Revenue Service considers that a home improvement that adds value to your home, so you can't deduct money you spent. You can, however, add your expenses to the "basis" for your home -- the basis is your investment in the property, which includes the price you paid and improvements you made. When you sell your home, you deduct your basis from the sale price to figure out if you need to pay capital gains tax. Your costs to finish a basement contribute to your basis and may reduce the tax you owe upon the sale of your house. However, unless you are flipping a house or expect to sell it for hundreds of thousands of dollars more than you paid, you probably won't owe any capital gains tax anyway, so the home-improvement expenses won't really help you out.

    Deduct Office Space

    You may be able to claim at least part of your basement finishing if you created a space that you use exclusively as a home office. The home-office deduction usually is restricted to self-employed people who work from home, and you'll have to show that the basement office was essential. You can deduct not only your improvement costs for creating that space, but also ongoing expenses relating to that space like depreciation, utilities and insurance. You'll have to calculate the percentage of your total home space that's used for an office, and deduct for that amount. For example, if your home office is 15% of your home according to IRS calculations, you can deduct 15% of your insurance premiums for the home. The IRS rules for qualifying for a home-office deduction and calculating the "business percentage" are strict, so be sure you understand them before going down this road.

    Accommodating a Disability

    You may be able to deduct basement finishing expenses if they were made to accommodate your disability or that of your spouse or dependent who lives with you. If the improvements increase the value of your home, you can only deduct your cost above the increase. You'll only to able to claim that part of the expense that was medically necessary -- aesthetic improvements don't count. Finally, you can only deduct your medical expenses -- including home accommodations -- that exceed 7.5% of your adjusted gross income. For example, if your AGI is $50,000, your first $3,750 of medical expenses (7.5% of $50,000) are not deductible.

    Get Some Deduction from Loans

    You can get some tax relief if you borrow money to refinish your basement. Interest on a home equity loan or line of credit secured by your home is deductible. This may offset only a fraction of your total expense, however.

    Look at Energy Efficiency

    Investigate any offsets for energy efficiency. Most tax credits for improving efficiency expired in 2011, but you may be able to qualify for some deductions for such things as energy-efficient furnaces and water heaters. Even if the IRS won't allow tax deductions, some utilities may give you credits for appliances that reduce your energy use.

    About the Author

    Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.