Your home is your castle, and of course it is important to keep your castle in good repair. The problem is, the cost of repairs can get pricey. You might wonder if the Internal Revenue Service gives you a break on the sales taxes for making those repairs. After all, you get a nice deduction for your mortgage interest and real estate taxes. The answer is -- maybe.
Sales Tax Deduction
For the 2011 tax year you had the option of deducting either your state and local income taxes or your state and local sales taxes. You had to have itemized your deductions on Schedule A of IRS Form 1040, and you were not able to claim both. You could include sales taxes you paid on merchandise and labor to repair your home. The IRS allowed you to claim either the actual amount of sales taxes you paid or to use the IRS sales tax deduction calculator. The IRS notes that the option to claim sales taxes instead of state and local income taxes expired as of the end of 2011. This deduction will not be available for the 2012 tax year unless Congress extends it.
Home Equity Loan
The IRS considers the interest you pay on a home equity loan or home equity line of credit to be mortgage interest. You can use your home equity loan or line of credit to purchase home repair supplies or to pay craftsmen to make repairs on your home. The sales tax you paid for these goods and services are included in the amount of your home equity loan. You can deduct the interest on the loan, even if you can't directly deduct the sales taxes.
Adjustments to Basis
There is a fine line between making repairs to your home, and making improvements to your home. Improvements either prolong your home's life, adapt it to new uses or increase its value. You can't deduct the cost of making improvements, but you can add the cost to your home's basis, resulting in lower capital gains taxes when you sell your home. The IRS considers repairs as anything you do to maintain your home in ordinary, efficient operating condition. This includes fixing leaks in your plumbing, painting the walls or refinishing your floors. Repairs do not increase your home's value or prolong its life, so you can't take a tax deduction for them and you can't add the cost of repairs to your home's basis -- with one exception. You can include the cost of any repairs you do as part of an extensive home remodel or home improvement project and add them to your home's basis.
Even if Congress extends the option to deduct your sales taxes, you might be better off claiming the standard deduction. The IRS recommends figuring your taxes using both the itemized deductions method and the standard deduction method, then filing your return using the method that provides the lowest tax obligation.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.