What is a Capital Improvement Exemption?
Handy Andy has been doing a number of capital improvement projects lately. A capital improvement project- in it's simplest definition - is any improvement that you make to your home that is permanent in nature, becomes an integral part of your real property, and substantially adds value to your home.
A capital improvement project in New York State, unlike a repair or a simple cosmetic change to your home is significant because it allows you to complete the work without paying sales tax. This blog post will help you to understand more about these tax saving improvements.
It should be noted that Handy Andy is a home improvement contractor and not a tax attorney. Even though the guidelines behind this section of the NY State tax law are relatively straight forward, you should always consult with a professional when you have questions regarding tax laws. That being said, many of our clients have had questions about this exemption so I figured I would take some time here to elaborate on some useful information.
More about Capital Improvements...
As previously mentioned, not all work done or money spent on you home can be classified as a capital improvement. If however, the work you are having done meets certain criteria, the tax savings are real and can make a difference to your pocketbook. So let's look at the criteria that the lawmakers use to define a capital improvement:
First, it needs to be both permanent and considered a actual part of your real property. So, it you were to renovate your kitchen or bathroom, this would be considered a permanent and integral part of your home. Major renovations or home additions are almost always going to be both permanent and an integral part of your home. It is when small pieces of a renovation are done or other projects are involved that this question must be explored further. For example, if instead of a full kitchen remodel you decided to upgrade just the flooring in your kitchen from vinyl to a granite tile, this upgrade would be considered permanent (or at least until the next time you decide to remodel) and also integrated since I have never heard of someone taking a floor with them when they sold their house. If however, your upgrade was merely changing out some of the appliances, this test requires further examination. A free standing refrigerator and stove are movable and not considered "part of the house", but what about a dishwasher? Any appliance that is considered built-in meets the criteria. So although a built-in dishwasher (or built-in refrigerator for that matter) would meet the guideline, a portable dishwasher or any appliance not considered permanently installed would not. Planning to replace your built-in cabinets? You can potentially avoid the sales tax. Thinking of just refinishing them? You will likely need to pay the tax. Generally speaking, a repair or maintenance of something that is already permanently installed in your home does not satisfy the requirement.
The second requirement is that the improvement being done needs to "substantially add value" to your home. Paint will certainly become an integral part of a room and can be considered permanent by guideline, but few would argue that it will add substantial value. If however, you hired a contractor to fully remodel your bathroom and painting it was part of the contract, you are meeting this requirement since the painting is necessary and part of a greater project. There are so many ways to argue what can be considered substantial however, and this is the good part of this requirement. If you can make the case that if you were to sell your house that you would command a higher price partly because of the work you are going to do, then you can meet this requirement. So although a new ceiling fan in your dining room is not adding substantial value, making your house a smart home by upgrading all the switches and outlets to work from a master control would. There is a definite gray area here though. Personal preferences however wont change your case. This is to say that remodeling your bathroom with neon yellow floor tiles probably is not going to get you a higher offer on your house when you sell it but then again, who knows? Regardless, you will have still met the guideline for a capital improvement.
One last important note: in order for you to claim the capital improvement sales tax exemption, your project must be done by a contractor and the materials that are being installed must be part of a contract. You can't plan to install new kitchen cabinets yourself and expect to buy the cabinets without paying sales tax. You also can't negotiate with a contractor to supply your own materials and just outsource the labor.
Do your homework and ask questions (as you should before hiring any professional or considering any renovation) and take advantage of the benefits you are allowed when making improvements to your home!