Bookkeeping tip 8 of 10 – Home Improvements

If you work from home and do some renovations to (for example) build a new addition to house your office.  You think it is a great deduction, but it is not!  I do not recommend  that you use household improvement receipts as a deduction.  If you do, any profit you make on your house, from the time you bought it, becomes eligible for capital gains tax when you sell it.  For example: you buy your house in 2000 for $150,000.  In 2010 you put an addition on your house for $30,000 and deduct the expense.  If you sell your house in 2011 for $220,000 ALL OF THE PROFIT, $70,000, BECOMES ELIGIBLE FOR CAPITAL GAINS TAX.  The tax you would pay on the profit from your house (all the way back to when you bought it) will likely never make up for what you would save in taxes by deducting the household improvement expenses.  So if you renovate your home office, don’t deduct it.  If you put up a fence at your home daycare, don’t deduct it.  It is a capital improvement if you do, and your house becomes a capital asset.  You probably do not want that.