The test for a home, and the list the IRS actually publishes. Publication 523 pairs its three-part test with a chart of examples, and the chart is more useful than any paraphrase because it settles the ordinary cases. Listed as improvements: additions such as a bedroom, bathroom, deck, garage, porch or patio; landscaping, a driveway, a walkway, a fence, a retaining wall, a swimming pool; storm windows and doors, a new roof, new siding, insulation; a heating system, central air conditioning, a furnace, duct work, wiring, a security system, a lawn sprinkler system; a septic system, a water heater, a filtration system; built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, a fireplace. The publication is equally explicit about the other side: costs of repairs or maintenance that are necessary to keep your home in good condition but do not add to its value or prolong its life are not improvements, and its examples are painting inside or out, fixing leaks, filling holes or cracks, and replacing broken hardware.
Three rules inside that section decide more real cases than the test does. The first is the extensive-remodel rule, and it runs in the taxpayer's favor. Publication 523: you can include repair-type work if it is done as part of an extensive remodeling or restoration job, and its own illustration is that replacing broken windowpanes is a repair while replacing that same window as part of a project of replacing all the windows in the home counts as an improvement. So work that would be a repair standing alone is absorbed into the improvement it forms part of, and there is no reason to split a single renovation invoice into two categories.
The second runs against the taxpayer and is almost unknown. Costs of improvements that are no longer part of your home do not count, and the IRS's own example is wall-to-wall carpeting that you installed and later replaced. A household that renovates the same kitchen twice does not accumulate the basis of both kitchens. The practical consequence is that a long-held home with a history of successive renovations has a smaller adjusted basis than its owner's receipts suggest, and the surprise arrives in the year of sale. The third is narrower but the same shape: an improvement with a life expectancy, when installed, of less than one year does not add to basis at all.
A fourth adjustment catches energy work. Where the cost of an energy-related improvement such as a solar system has gone into basis and a tax credit or a utility subsidy was received for it, that credit or subsidy must be subtracted from total basis. The benefit is taken once, not twice.
Property held for business or for the production of income is a different regime, and merging the two is the error to avoid. For a rental, a home office computed on actual expenses, or any other property held for the production of income, the governing rule is Treas. Reg. 1.263(a)-3(d): a unit of property is improved if amounts paid for activities performed after it is placed in service are for a betterment to the unit of property, restore the unit of property, or adapt it to a new or different use. Those three words are terms of art with their own regulatory definitions, and they are not a restatement of the Publication 523 test. Two relief provisions exist on this side and have no counterpart on the personal-residence side. The routine-maintenance safe harbor at 1.263(a)-3(i) deems an amount paid for recurring activities that keep a building structure or system in its ordinarily efficient operating condition not to improve it, but only where the taxpayer reasonably expects to perform those activities more than once during the 10-year period beginning when that structure or system was placed in service. A de minimis election under 1.263(a)-1(f) and a small-taxpayer safe harbor under 1.263(a)-3(h) also sit here, each with its own dollar thresholds and its own election mechanics.
A third, unrelated sense you will meet from a contractor. Several states use the same phrase in their sales tax rules to decide whether the contractor's charge is taxable, and the test is neither of the federal ones. New York's Tax Bulletin ST-104 requires that the work substantially add to the value of the real property or appreciably prolong its useful life, that it become part of or be permanently affixed to the real property so that removal would cause material damage, and that it be intended to become a permanent installation; the customer gives the contractor Form ST-124, a certificate of capital improvement, and the contractor's charge for the job is then not taxed while a repair would be. That certificate decides sales tax on someone else's invoice. It has no bearing on your basis, and a contractor's view of it is not a substitute for the federal test.
