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How to write off your home improvement costs as medical expenses

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in Small Business Tax

Maybe you’re not planning to move anytime soon despite the new homebuyer credit. As long as you’re staying put, you might decide to invest some money into the house. But you generally receive no current tax benefit from home improvements. The cost is simply added to your basis. 

Strategy: Make home improvements needed for medical reasons. If certain requirements are met, you can deduct a portion of the cost this year. What’s more, you can write off additional upkeep and maintenance expenses year in and year out.

Of course, your annual medical deduction is limited to the amount of your qualified expenses above 7.5% of your AGI. Installing a medically necessary home improvement might push you over the 7.5%-of-AGI threshold for the year. And if you expect to clear this hurdle anyway, go for it—the extra deduction you’ll get is pure gravy.

Here’s the whole story: To qualify as a deductible medical expense, the cost must be incurred primarily for the prevention or alleviation of a physical or mental defect or illness. (IRS Regulation 1.213-1(e)) An expense that is merely beneficial to your general health or well-being isn’t deductible.

In the case of medically necessary home improvements, the qualified medical expense is equal to the cost above the resulting increase in the home’s value if you own the home. Improvements made by tenants are fully deductible (subject to the 7.5% limit).

Example: Everybody into the pool

For simplicity, let’s assume you expect your AGI for 2010 to be $100,000 and you normally incur $5,000 in unreimbursed medical and dental expenses a year. To help alleviate your spouse’s arthritis, you install a heated swimming pool in your backyard. The pool costs $40,000, plus you pay an additional $10,000 for a fence (required by a town ordinance). An appraiser estimates that the improvements will increase your home’s value by $25,000—half of your outlay.

Without the home improvements, you get no medical expense deduction for this year. Reason: Your total unreimbursed medical expenses don’t exceed 7.5% of your AGI. However, $25,000 of the pool cost qualifies for the medical expense deduction.

New result: You’re entitled to a deduction of $22,500 this year (the excess of $30,000 of medical expenses—$25,000 from the pool plus the other $5,000 of medical and dental expenses—over 7.5% of your AGI).

To top things off, you can deduct your annual operating and maintenance costs for the pool. If you spend another $1,500 in utilities and related expenses, your deduction for this year increases to $24,000.

Some other common examples of home improvements that can be deductible as medical expenses are air conditioning installed to alleviate a child’s asthma, an elevator constructed for an adult with a heart condition and special modifications for a disabled person. Find others in IRS Publication 502 (Medical and Dental Expenses).

Tip: Obtain a written appraisal from an independent real estate expert establishing the increase in your home’s value (if any) due to the medically related home improvement. Also, if a physician prescribes a home improvement to alleviate a medical condition, get the statement in writing.

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