For tax purposes, any work you do on your house falls into one of two categories: improvements and repairs. Improvements can be deducted from your resale profits to lower your potential liability for capital gains taxes. Repairs cannot be deducted at all.
The Internal Revenue Service defines an improvement as something that adds value to your home, prolongs its useful life or adapts it to new uses. Examples include turning an unfinished basement into a recreation room, adding another bathroom or bedroom, building a fence, putting in new plumbing or wiring, putting on a new roof or paving your driveway.
The IRS says repairs simply keep your home in good condition, so their cost cannot be deducted. These generally include repainting your house, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes.
Since profits from the sale of a principal residence now qualify for an exclusion of up to $250,000 ($500,000 for couples filing jointly), few people will face the prospect of paying capital gains taxes. However, gains on the sale of a vacation home are taxable, so improvements would tend to reduce your tax liability.
