Take advantage of the capital gains tax savings on interior expenses, here's all you need to know

learn how to save on capital gains tax on home improvement expenses. from distinguishing between capital and revenue expenses, to what expenses you can deduct, to preparing supporting documentation, we've put together a list of practical tips to reduce your capital gains tax.

can home improvement expenses reduce your taxes when you sell your home?

if you sell your home and make a profit, you'll owe capital gains tax on the proceeds. Many people don't realize how much they owe until they receive their capital gains tax bill. But there are ways to reduce your capital gains tax by claiming your home improvement expenses as necessary expenses.

the key is to organize and document your home improvement expenses properly. You need to make sure they're capital expenditures recognized by tax law, not just things you've done to make your home look pretty. In this article, we'll walk you through which home improvement expenses qualify and how to prepare them.

what's the difference between capital and revenue expenses?

the tax law divides expenses into two main categories. capital expenses and revenue expenses.

capital expenses are expenses that increase the useful life or value of your home. for example, replacing old fixtures with new ones, or making structural changes that increase the value of your home. things like replacing porch sashes, replacing your entire HVAC system, building a balcony extension, or gutting your floors.

on the other hand, beneficial expenditures are those that maintain or restore your home to its original condition. these include basic pre-move-in improvements such as painting, sheetrock, and wainscoting, as well as maintenance work such as replacing the sink and toilet.

only capital expenditures qualify as necessary expenses when calculating transfer taxes. revenue expenses don't qualify, no matter how much money you spend on them. however, there are case law examples where a complete bathroom remodel has been recognized as a capital expense, but it's not guaranteed in all cases.

which interior items qualify as necessary expenses

when it comes to what exactly qualifies as a capital expense, here are some common examples.

replacing porch sashes or entire windows are the most obvious qualifiers. the same goes for a balcony extension, which will definitely increase the value of your home by adding more usable square footage.

new heating and cooling installations or replacing the entire system also qualify. if you've replaced your boiler or added a new air conditioner to your system, you just need to have good proof.

gutting your floors also qualifies as a capital expense. if you replaced the entire flooring, rather than just the sheetrock, then it's likely eligible. this would include things like installing new flooring or replacing all of the tile.

kitchen and bathroom remodeling varies on a case-by-case basis. if you only replaced the sink or toilet, it's a revenue expense, but if you gutted the entire kitchen or bathroom, it could be considered a capital expense.

apartment options are also an expense

you can also deduct the cost of options that were included in the contract when you bought the apartment. these are things like built-in cabinets, double doors, system air conditioning, balcony extensions, and built-in appliances.

these options are relatively easy to prove because they're listed in the sales contract and you can see how much they cost. however, if you've lost your sales contract, you'll need to ask the builder for a replacement.

since the options were contracted for before you took delivery of the home, you can either include them in the purchase price or treat them as a separate capital expense. you'll need to do a full transfer tax calculation to know which is better, so it's best to consult a tax advisor.

you can't claim it without documentation

even if you've done work that qualifies as a capital expense, you can't claim it as a necessary expense without supporting documentation, because tax calculations are only possible if you can prove the actual expenditure.

you'll need things like bills, tax invoices, credit card statements, cash receipts, and direct deposit statements. if you signed a contract with the contractor, keep that too. before and after photos are also helpful.

if you lose the contract or can't find the purchase price at the time of acquisition, you'll use the reduced purchase price. in this case, you may not be able to deduct the work as a necessary expense, even if it qualifies as capital expenditure. At the end of the day, documentation is the key to saving on transfer taxes.

if you can properly substantiate your actual expenditures, you'll only be taxed on the transfer value minus your necessary expenses. In other words, the more necessary expenses you can claim, the less you'll be taxed on, and the lower your tax liability.

frequently asked questions

Q. does painting and hanging wallpaper count as a necessary expense?

A. Unfortunately, simple painting and replacing sheetrock is classified as a profitable expense and is not eligible as a necessary expense because it's maintenance to keep your home in its original condition.

Q. how do I prove that I paid cash for decorating expenses?

A. If you have a cash receipt, that's fine. If you don't have a cash receipt, try to gather as much documentation as you can, such as bank statements, contracts, and estimates. however, if you don't have enough proof, it may be difficult to get your claim recognized.

Q. can I claim work done years ago?

A. Yes, you can claim any capital expenditure you make during the holding period. this is why it's important to keep documentation of all the work you've done since you bought your home, even if it's 10 years old, as long as you have proof.

Q. i'm confused about capital and revenue expenses

A. It depends on whether it increases the value or extends the life of your home. if you're unsure, it's best to consult a tax advisor. do it before you file your transfer taxes.

Q. does VAT count as a necessary expense?

A. Yes, the VAT shown on your tax invoice is included as a necessary expense. you can claim the entire amount of the construction costs plus VAT as an expense.

wrapping up

saving on capital gains tax on home improvement expenses starts with identifying your capital expenditures and keeping good documentation. keeping your construction documents until you sell your home and consulting with a tax professional before filing your transfer tax return can significantly reduce your tax burden.

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