Rental Investment Property

• If you own a rental investment property, the IRS allows you to deduct home improvement costs. These deductions include sales tax on services, labor and products purchased specifically for the upkeep of the property. The expenses are reported on Schedule C of Form 1040 to show the total profit or loss on your rental investment. If you have accurate records and receipts for these expenses, you should not have any audit issues.
  
  

Primary Residence

• Sales tax on home improvement projects for your primary residence is not tax-deductible. Home improvements and maintenance on your primary residence is your responsibility as a homeowner, and improvement expenses and sales tax are not deductible. The best way to avoid an IRS audit and legally claim home improvement expenses is to take out a second mortgage on your property. Interest on your second mortgage is tax-deductible.
  
  

Upgrades vs. Maintenance on Rental Property

• If you own a real estate investment, home improvements are tax-deductible as long as the improvements are necessary to the maintenance of the property. Audit issues arise when you deduct sales tax on home improvements that increase the value of the property. These upgrades are depreciable expenses that the IRS does not consider eligible deductions on Schedule C.
  
  

State and Local Taxes

• According to the IRS, you can deduct sales tax on all expenses, including home improvements, instead of deducting state and local income taxes. You cannot itemize both on Schedule A of your tax return. If you choose to deduct sales tax, it is advisable to keep receipts of all purchases. If an audit issue arises, you may need records of your purchases and amounts spent on sales tax.