It’s tax season- and that means there’s one thing on everyone’s minds: potential deductions. You may be asking yourself “is my new driveway a tax deduction?”
There are several instances where your home improvement project can save you money on your taxes!
For tax purposes, ‘home improvement’ includes any work done that “adds substantial value to your home, increases its usefulness or adapts it to new uses.” Examples include room additions, new bathrooms, new roofs, plumbing upgrades and- yes- new driveways! All of these things have the potential to save you money on your taxes- either in the short-term or long-term.
Here’s a few tips to keep in mind when it comes to possible deductions from your new driveway.
Primary Residence Rules
If you get a new driveway installed at a home that is used purely as your primary residence, you won’t be able to deduct the cost on your taxes for that same tax year. However, that doesn’t mean you won’t benefit from the investment.
By installing a new driveway, you increase the “tax basis” of your property. Your tax basis includes the amount you’ve invested in your property over time. This means, if you were to sell that property, you’d be able to deduct the cost of your home improvements in order to lower the amount that you’re subject to pay in taxes after the sale, as your total profit would be lower.
Here’s an example: You bought your home for $300,000 and then spent $50,000 on various home improvements – including installing a new fence. You then sell your home for $400,000. Rather than paying taxes on the full $400,000 sale price, you can deduct the tax basis (the original cost of your home + the cost of the home improvements you invested in.) $400,000 minus a tax basis of $350,000 leaves you with just $50,000 profit subject to tax.
For this reason, you can think of installing a new driveway at your home as a long-term investment because it can help you save money down the line.
Business Property Rules
If you own a business, you’re likely familiar with the rules for business expense deductions. Like other business expenses, your new fence needs to be ordinary and necessary to the business in order to classify as a legitimate deduction.
There are several reasons why a new driveway would be necessary for your business, however. For example, an old driveway with significant cracks that poses a safety hazard would need to be replaced for the sake of your business. Sometimes driveways need to be updated to accommodate heavier commercial vehicles, like delivery trucks.
Improvements to your business property are typically deductible on the taxes filed for the year that the project is completed.
Rental Property Rules
Home improvements to your rental property can often count as a tax write-off. Similar to the rules for deductible home improvements to a business property, improvements made to your rental property would need to be necessary and ordinary to keep the property in good shape and liveable for tenants.
People who use a portion of their property or home as a rental can still deduct some of the expense. In this case, the homeowner can calculate the percentage of the home that is rented out and then use that percentage for the amount of home improvement expenses that would be deductible.
As with business properties, improvements to rental properties are also typically deductible on the taxes filed for the year the project is completed.
Repair Vs. Replacement
Many people ask "is replacing a driveway tax deductible?" For tax purposes, it matters what type of work you’re doing to your driveway. The IRS differentiates between a repair and an improvement (or new fence). If you purchase a home with an existing driveway in disrepair, you can’t add the cost of fixing the driveway to your tax basis. In this case, repairing it is considered regular maintenance of the home.
Things like repairing minor cracks in your driveway or similar projects are not considered improvements. However, if you replace an existing driveway with a new driveway that is different, this constitutes an improvement.
A quality driveway is a wise investment for many reasons- including the potential to save money on your taxes. Whether the benefits are seen immediately or further in the future, all of these considerations are good to keep in mind. Consult with a tax professional before you embark on a project as potential tax savings. You can read more about tax deductions for home projects on the IRS website.