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Is building a fence tax deductible?

In a normal case, you can deduct both the cost of the labor and the cost of the materials for your new fence. However, you can't deduct the cost of your own labor- which means if you choose to DIY your fence you could miss out on some of the tax savings.

ergeon.com - How Your Fence Can Be Tax Deductible - Ergeon

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March 23, 2021

It’s tax season- and that means there’s one thing on everyone’s minds: potential deductions. Did you know that your new fence has the potential to save you money on your taxes?

For tax purposes, ‘home improvement’ includes any work done that adds substantial value to your home, increases its usefulness or adapts it to new uses. Examples include room additions, new bathrooms, new roofs, plumbing upgrades and- yes- new fencing! All of these things have the potential to save you money on your taxes- either in the short-term or long-term. Here’s a few tips to keep in mind when it comes to possible deductions from your new fence. ‍

Primary Residence Rules

If you get a new fence installed at a home that is used purely as your primary residence, you won’t be able to deduct the cost on your taxes for that same tax year. However, that doesn’t mean you won’t benefit from the investment. By installing a new fence, you increase the “tax basis” of your property. Your tax basis includes the amount you’ve invested in your property over time. This means, if you were to sell that property, you’d be able to deduct the cost of your home improvements in order to lower the amount that you’re subject to pay in taxes after the sale, as your total profit would be lower. Here’s an example: You bought your home for $300,000 and then spent $50,000 on various home improvements – including installing a new fence. You then sell your home for $400,000. Rather than paying taxes on the full $400,000 sale price, you can deduct the tax basis (the original cost of your home + the cost of the home improvements you invested in.) $400,000 minus a tax basis of $350,000 leaves you with just $50,000 profit subject to tax. For this reason, you can think of installing a new fence at your home as a long-term investment because it can help you save money down the line.

Business Property Rules

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If you own a business, you’re likely familiar with the rules for business expense deductions. Like other business expenses, your new fence needs to be ordinary and necessary to the business in order to classify as a legitimate deduction. There are several reasons why a new fence would be necessary for your business, however. For example, an old fence that poses a safety hazard would need to be replaced for the sake of your business. A privacy fence may be necessary, depending on the nature of your business. A chain-link fence may be necessary to clearly mark your business property line and keep out intruders, etc. Improvements to your business property are typically deductible on the taxes filed for the year that the project is completed.

Rental Property Rules

Home improvements to your rental property can often count as a tax write-off. Similar to the rules for deductible home improvements to a business property, improvements made to your rental property would need to be necessary and ordinary to keep the property in good shape and liveable for tenants. People who use a portion of their property or home as a rental can still deduct some of the expense. In this case, the homeowner can calculate the percentage of the home that is rented out and then use that percentage for the amount of home improvement expenses that would be deductible. As with business properties, improvements to rental properties are also typically deductible on the taxes filed for the year the project is completed.

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Repair Vs. Replacement

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Many people ask "is replacing a fence tax deductible?" For tax purposes, it matters what type of work you’re doing to your fence. The IRS differentiates between a repair and an improvement (or new fence). If you purchase a home with an existing fence in disrepair, you can’t add the cost of fixing the fence to your tax basis. In this case, repairing it is considered regular maintenance of the home. Things like repairing a fence that was blown down by a storm or repairing one that had significant rotting are not considered improvements. However, if you replace an existing fence with a new fence that is different, this constitutes an improvement. You may need a full replacement due to damage or due to use case (for example, if you need to build your fence to a new fence height for privacy.)

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DIY Can Lower Your Deduction

In a normal case, you can deduct both the cost of the labor and the cost of the materials for your new fence. However, you can’t deduct the cost of your own labor- which means if you choose to DIY your fence you could miss out on some of the tax savings. There are also several other reasons why a DIY fence is a bad idea, so consider all factors before endeavoring to install a new fence yourself. A quality fence is a wise investment for many reasons- including the potential to save money on your taxes. Whether the benefits are seen immediately or further in the future, all of these considerations are good to keep in mind. Consult with a tax professional before you embark on a project as potential tax savings. You can read more about tax deductions for home projects on the IRS website.

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