With politicians constantly bemoaning loopholes in the tax code, you're excused for thinking you could claim a hefty tax deduction for installing or maintaining a backyard swimming pool. You might be able to claim the pool’s cost as a medical or business expense under limited circumstances, but it's more likely that you’ll probably have to treat your pool as any other capital improvement to your home.
If your doctor has recommended that you install a pool to help treat or prevent a specific illness and provides a note to back up this claim, you may be able to deduct the construction and maintenance costs of your pool. You’ll need to build it to treat a specific illness, though, not just as an all-around health enhancer. A pool for swimming laps to stay trim won’t qualify, but one built for a multiple sclerosis patient to undergo aquatic therapy might. Even if your pool qualifies as a medical expense, the Internal Revenue Service only allows you to claim any construction costs that exceed the amount the pool would increase your home’s value. So if you spend $20,000 to build a pool that increases your home’s value by $17,000, you can only claim a $3,000 deduction.
If workers of all stripes can claim a home office deduction, couldn’t you build a pool to use as a home base for a swimming lesson or aqua aerobics business? The jury’s still out on that: According to the Bloomberg Business Week website, that deduction will hinge on how the tax man interprets tax law. If he views the pool as a location in your home, similar to a home office, you’re probably out of luck. Home-office deductions can only be claimed if you use the area exclusively for business. If you or your family dips a toe in the water for recreational purposes just once, you lose the deduction. If the IRS treats the pool as a business asset, you’ll be able to claim a portion of its cost equal to its business use. Either way, your backyard aquatics business needs to turn a profit three out of five years to enable you to deduct any business expenses.
In all likelihood, you won’t be able to deduct the cost of that pool on your taxes. For most backyard swimmers, this means you’ll need to treat the installation of the pool as a capital expense. In the short term, this is just another nondeductible expense. Unlike a repair or maintenance, capital improvements increase the value of your home. Because of this, installing a new pool is a capital improvement, but replacing a crumbling one with a pool of comparable size is a repair. You won’t be able to deduct these expenses this year, but don’t trash your receipts: They may help you when you sell the home.
Although the IRS exempts from taxes the first $250,000 in gains, or $500,000 if you’re married, when you sell your primary residence, you may end up owing capital gains taxes when you sell your home. You’ll figure your gains by subtracting the home’s purchase price from its sale price. You’ll also get to subtract the cost of any capital improvements such as your pool -- as well as other sales costs -- from your profits, so the cost of your pool can eventually be used to defray capital gains taxes.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.