Capital improvements vs. repairs: where the IRS draws the line

This is the distinction that decides whether a cost lowers your tax bill or does nothing for it. A capital improvement gets added to your cost basis. A repair does not. And the exact same dollars can land on either side depending on the context.

The test

IRS Publication 523 treats work as an improvementif it adds to the home's value, prolongs its useful life, or adapts it to a new use. Work that merely keeps the home in good working condition — without doing any of those three — is a repair, and repairs don't add to basis.

Clear examples

• Replacing a single broken windowpane is a repair. Replacing all the windows is an improvement.
• Fixing a leak in the roof is a repair. A whole new roof is an improvement.
• Patching a section of a driveway is a repair. Paving a new driveway is an improvement.
• Repainting a room is a repair. It doesn't add to basis on its own.

The exception that surprises people

Repairs done as part of a larger remodel or restoration can be included. If you gut and rebuild a kitchen, the patching, repainting, and small fixes that are part of that job come along for the ride — the whole project counts. The same is true for repairs made to restore a home after a casualty like a fire or storm (reduced by any insurance reimbursement).

Rule of thumb: a repair standing alone doesn't count, but a repair folded into a genuine improvement project usually does.

Why you should itemize a big project

A large renovation often mixes both. A $150,000 “kitchen remodel” might include $100,000 of construction and built-ins (an improvement) and $50,000 of free-standing furniture and décor (furnishings — personal property that doesn't add to basis). Lumping them into one line overstates your basis and creates exactly the kind of soft number an auditor pulls on.

Breaking a project into itemized costs — and classifying each piece — is what turns a receipt pile into a defensible record. That's the whole idea behind the KeepBasis tracker: log a project, itemize it, and each line gets checked against Pub 523 automatically.