Q: About two weeks ago, on one of the hottest days of the year, my home air conditioner went kaput. The repairman said it had to be replaced, along with the furnace. The whole package will cost about $3,000.
Would this work be considered a capital improvement? If so, would I be allowed to deduct the expense from my taxable gain when I sell the home?
A: A capital improvement is anything that adds value to your home or appreciably prolongs its life. Therefore, replacing the air conditioning and furnace would be considered an improvement.
As you stated, the amount you paid could be used to reduce your taxable gain when you sell the property.
To find your taxable gain, you would subtract the cost of your home, plus the cost of improvements, from the selling price. You also could deduct expenses associated with selling the house.
For example: Suppose you paid $100,000 to buy your house, and you sold it for $150,000. You would add the $3,000 for improvements to the original $100,000. Then subtract the total ($103,000), from the selling price ($150,000.) That leaves you a taxable gain of $47,000.
But you could defer paying taxes on the proceeds by reinvesting the profits in another home of equal or greater value.
The IRS has a free booklet that offers tax tips for homeowners. To get a copy, call (800) 829-3676. Ask for publication 523, "Tax Information on Selling Your Home."
(Send your questions on personal finance to The Philadelphia Inquirer, 400 N. Broad St., P.O. Box 8263, Philadelphia, Pa. 19101. Questions cannot be answered personally.)