Tax Deductions for a Lawn Sprinkler Upgrade

Tax Deductions for a Lawn Sprinkler Upgrade
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Upgrading a lawn sprinkler system provides a number of advantages for homeowners: They benefit from a healthier lawn and may save money and conserve water in the process. However, homeowners often overlook the potential tax savings available when they upgrade a lawn sprinkler system. Such improvements provide possible tax deductions for homeowners — but they need to understand how and when tax deductions apply to reap the benefits.

Home Improvement Tax Deductions

The Internal Revenue Service allows homeowners to claim deductions for certain home improvements, including installing or upgrading a lawn sprinkler system. Homeowners can't claim the deduction in the year the upgrade is completed. Instead, improvements increase the cost basis, or the original value of the home based on the purchase price. An increase in the cost basis provides a homeowner with potential tax savings if they later opt to sell the home. The sale price of the home determines whether the deduction adds up to real savings.

Qualifications for Tax Deduction

The Internal Revenue Service sets guidelines in terms of what qualifies as a home improvement: In the eyes of the IRS, a home improvement is something that adds to the value of the home. A sprinkler system upgrade qualifies as a home improvement. The IRS, though, doesn't consider a repair to be an improvement. If your sprinkler system is in disrepair, you can't add to the basis of your home when you repair it. The IRS allows you to claim the repair on the cost basis, however, if you also upgrade your lawn sprinkler system. Ask a lawn sprinkler professional whether a specific situation qualifies as a home improvement or only as a home repair. This helps you determine whether you qualify for a cost basis adjustment.

Amount of Tax Deduction

The actual amount that a homeowner saves by making a lawn sprinkler upgrade depends on a number of factors. The Internal Revenue Service doesn't assess tax on the first $250,000 of profit from the sale of a home that's a principal residence. Therefore, a home bought for $300,000 and sold for $350,000 doesn't earn any actual tax deduction when a lawn sprinkler upgrade increases the cost basis to $305,000. The only real deduction occurs if the home in question sells for a price that's at least $250,000 more than the purchase price. A home bought for $300,000 and sold for $555,000, for example, qualifies for a deduction of $5,000 when a $5,000 lawn sprinkler upgrade has increased the cost basis to $305,000. If the home sells for more than $555,000, any amount above this figure is subject to taxation.

Property Tax Impact

Although you might be able to claim an income tax deduction for an upgrade to your lawn sprinkler system, this upgrade also may increase your property value — and by increasing your property value, you may be forced to pay higher property taxes. The increase in property taxes may offset any savings you receive from a deduction on other taxes. Investigate whether your county’s tax assessor intends to review the value of your property after you upgrade your lawn sprinkler system. If this is the case, you need to know how much the value of your property will increase.