Just had to get some electronics replaced in our household refrigerator and had a tax related thought/question for the gurus here:
Because the fridge usually gets sold/bundled with the house is it ok to add the costs of the repair to the cost basis of the house (when it comes time to sell)?
Because the fridge usually gets sold/bundled with the house is it ok to add the costs of the repair to the cost basis of the house (when it comes time to sell)?
No, presuming that you were just replacing like electronics with like electronics. Repairs are not considered capital improvements. If you had replaced the refrigerator with a better, more efficient one, that could be considered a capital improvement. But repairing the current one without any upgrades to the original performance would not be a capital improvement.
AJ
Because the fridge usually gets sold/bundled with the house is it ok to add the costs of the repair to the cost basis of the house (when it comes time to sell)?
No, presuming that you were just replacing like electronics with like electronics. Repairs are not considered capital improvements. If you had replaced the refrigerator with a better, more efficient one, that could be considered a capital improvement. But repairing the current one without any upgrades to the original performance would not be a capital improvement.
It’s not often that I disagree with aj, but this is one of those times. Even if you upgraded the refrigerator in a way that made it substantially better/more efficient/etc., it wouldn’t be a capital improvement. Capital improvements to real estate typically need to be permanently affixed to the building/property. An appliance isn’t. With the right circumstances, you might be able to argue that you’ve substantially improved the “refrigerator” asset, but that would only have (tax) value if you were reporting the sale of the refrigerator separately from the sale of the house.
If you upgrade the refrigerator (non-capital improvement) in the process of selling the house, the cost of the repair might be includible as a cost of sale. This would have the same effect as treating it as a capital improvement, but the legal justification for inclusion would be different.
Ira
Thanks AJ and Ira.
Always interesting to learn the ins and outs of the tax code.
So how extensive does the “permanently affixed” need to be?
Fridge, no. Makes sense.
But what about cabinets and pegboard that I’ve installed in the garage (actually it’s Rubbermaid Fasttrack Wall which is more or less the same thing as pegboard…but better). They are attached to the wall with screws…which I guess could be unscrewed. Of course, so could the sheetrock…
Always interesting to learn the ins and outs of the tax code.
So how extensive does the “permanently affixed” need to be?
You can get a better sense of what the IRS thinks by reading through Pub. 523, Selling Your Home, www.irs.gov/pub-irs-pdf/p523.pdf. Keep in mind that IRS Pubs are not authoritative and there may be conflicting positions that have prevailed in Tax Court.
Ira
If you replaced with something permanent like a walk in cooler it would probably qualify.
Capital improvements to real estate typically need to be permanently affixed to the building/property.
That brings up an edge-of-the-envelope question for me. If I “upgrade” my refrigerator to a built-in/walk-in refrigerator, would that count as a capital improvement? If so, would the improvement be the cost of the installation less the cost of the prior fridge, or would it be the whole cost of the installation (eliding the likelihood that the cost even of a Sub Zero is likely to be chump change compared to the upgrade)?
Thanks
Eric Hines
That brings up an edge-of-the-envelope question for me. If I “upgrade” my refrigerator to a built-in/walk-in refrigerator, would that count as a capital improvement? If so, would the improvement be the cost of the installation less the cost of the prior fridge, or would it be the whole cost of the installation (eliding the likelihood that the cost even of a Sub Zero is likely to be chump change compared to the upgrade)?
Generally speaking, and I’m hedging my answer because there are many gray areas in the determination of capital improvement and what costs are included, it would be the entire cost of the project. I am assuming that this is a replacement/improvement of a free-standing appliance refrigerator. The replaced appliance was not part of the original basis of the home.
In contrast, if you were to replace and upgrade your heating system, you would increase your basis by the cost of the replacement project (furnace and installation) but reduce the basis by the basis of the replaced system.
All of this is discussed in Pub. 523 referenced earlier.
Ira
irasmilo:
OP: {{{Always interesting to learn the ins and outs of the tax code.
So how extensive does the “permanently affixed” need to be?}}}
“You can get a better sense of what the IRS thinks by reading through Pub. 523, Selling Your Home, www.irs.gov/pub-irs-pdf/p523.pdf. Keep in mind that IRS Pubs are not authoritative and there may be conflicting positions that have prevailed in Tax Court.”
Not a tax guy, and I know better than to contradict irasmilo, but I understand that the requirement is similar to a “fixture” as defined in the real estate world.
Fixture - “An object that was once personal property that has become so affixed to land or structures that it is legally a part of the real property.”
"Whether an item of personal property has been so permanently attached as to constitute realty is a question of fact. [Texas] Juries consider three factors when determining whether personal property has become real property:
Will the property damaged by removal? If so, to what extent? (This question determines the mode and sufficiency of attachment.)
Is the item customized for the property, or is it standard? (This determines the adaption of the item to the use of purpose of the realty.)
Was the installation intended to be permanent or temporary? (This question addresses the intention of the party who attached the item to the realty.)
The party’s intention is the predominant factor, while the first two factors constitute evidence of that intention. Testimony of intention will not prevail, however, in the face of undisputed evidence to the contrary. [Logan vs. Mullis, 686 S.W.2d 605, 607 (Tex. 1985)]
https://www.texasrealestate.com/members/legal-and-ethics/res…
"A fixture is essentially personalty that has become realty; that is, it is personalty that has been so permanently affixed to the realty as become part of it. So when is something “permanently affixed” to realty? Courts consider the following criteria when determining what constitutes a fixture:
(1) the mode and sufficiency of annexation, either real or constructive;
(2) the adaptation of the article to the use or purpose of the realty; and
(3) the intention of the party who annexed the personalty to the realty."
See, https://www.jgradyrandlepc.com/real-estate/house-fixtures-se…
See also, https://www.txcourts.gov/media/943990/130053.pdf
Unless a frig is substantially built-in, I doubt that is is a fixture (even if a water line is connected for an ice-maker or though the door chilled water dispenser.
Regards, JAFO
Because the fridge usually gets sold/bundled with the house
I think the rest of the issue has been well discussed, so I’ll just comment on this bit.
Refrigerators (and washers and dryers) being included with a house is not a universal thing. It’s a local or regional custom.
While I’m not a big time house flipper (bought twice, sold once) these appliances have never been included with the house. My purchases did not include them, and when I sold I took mine with me.
Just another thing to make sure you understand about a real estate transaction, especially when considering a transaction in an area outside of your experience.
–Peter
PS - OK, one tax comment. Basic repairs such as this don’t get added to the basis of the house any way. If you were to change the appliance from fridge to HVAC (which is almost certainly going to be considered part of the house), you still couldn’t add the cost of a replacement electronics board to the basis of the house.
Not a tax guy, and I know better than to contradict irasmilo, but I understand that the requirement is similar to a “fixture” as defined in the real estate world.
No contradiction at all. You stated clearly what I was afraid to try to explain because I was sure I wouldn’t get it right.
Ira