Thanks to a very straightforward yet little known tax law, you could be in a position to deduct the cost of installing your swimming pool.
In this lesson, I’ll walk you through how to do this and what steps you’ll need to take before taking the plunge!
Swimming pools by the IRS are typically considered upgrades or home improvements. Remodeling your bathrooms, installing a new deck, or even finishing your basement are other examples of upgrades you can add to your home.
The two realities about home improvements are:
- Generally, you can’t deduct them.
- You will owe taxes on the difference between the new value of your home and what you sell it for.
Let’s break this down and use a little bit of “nerd language”
Say you bought your home for $300,000. This is called your home’s Basis.
One day you decide to spend $100,000 on upgrading your home. Upgrading your home is called Capital Improvements. What you spent on upgrading your home, in turn, increases the Basis of your home to $400,000.
Make sense so far?
The difference between the new Basis of your home ($400,000) and what you sell your home for is called Capital Gains.
So, if you sell it for $500,000 you have a gain of $100,000.
And guess what happens to that $100,000? You get taxed a Capital Gains Tax.
This might have you saying, “Wait! Did I just get taxed on the same money twice?”
Yes, unfortunately this is one of the ways we get rewarded (really, penalized) for growth and success by our tax system. Whether you agree with this logic or not, it’s an unfortunate fact.
So are there any Capital Improvements that actually ARE deductible?
Yes there are! In fact, there are numerous opportunities for deductions that could benefit your personal situation, but today I want to introduce you to those that are medical-related.
They fall under IRS Code Section 105.
And a swimming pool is one example!
Herbert Sherry and Charles Labaugh
Here is a quick real-world swimming pool case that has an actual IRS outcome.
Two different and unrelated individuals, Herbert and Charles, wanted to have a pool installed for what they each claimed were medical reasons.
Herbert built a pool and wanted to deduct it since his doctor told him he needed to lose weight. The doctor also said, if Herbert swam daily it would help his emphysema and bronchitis condition.
Charles also had a pool installed. He claimed it was medically related and his doctor also suggested he lose weight saying a daily swim would improve his health.
And the result?
Herbert was allowed the deduction and Charles was denied.
Here’s the kicker. Herbert not only installed a 20’x40’ pool, but it was also a heated pool in his home! The indoor pool room spanned about a third of the size of his house and had no specialized medical equipment or lifts. It did, however, come fully equipped with a diving board.
But wait! There’s more…
The IRS also agreed that Herbert was not only able to deduct the entire cost of building the pool, but he could deduct the yearly costs of heating the pool, electricity, insurance, and the repair bills for replacing a wall ridden with mildew in the indoor pool room.
So what happened?
It’s all about why, how, and when
Herbert and Charles both knew the importance of WHY; they each claimed medical reasons were the driving force for a pool.
But Herbert knew HOW to prove it. The IRS refers to this as Proof of Primary Purpose.
Herbert knew the best way to prove it was with actual documentation from his doctor that would support his purpose behind building the pool.
To do this, he had a credible doctor’s note stating swimming daily would help manage his weight, his emphysema and bronchitis. He was also able to show documentation that within five days of not swimming regularly, his symptoms returned.
Charles was quite different. The only evidence he could present was his own testimony that his doctor advised him to lose weight. He did not have a doctor’s note detailing swimming nor aquatic exercise as a recommended activity.
As a result, Charles could not prove he used the swimming pool for medical purposes or even to attempt to lose weight.
And a final important piece of this puzzle…Herbert knew the importance of WHEN.
He had the pool installed only after the doctor’s guidance. Meaning, he got the documentation in place prior to construction.
It’s important to note that Herbert did actively use the pool twice a day, every day, with his family members using the pool only on occasion.
There are numerous capital improvements you can deduct under the Section 105 regulation. In addition to a swimming pool, these medical-related upgrades can include:
- Entrance and exit ramps to your residence
- Railing or support bars
- Modifications done to bathrooms to make them more accessible
- Lowering kitchen cabinets
- Alternating the location of electrical outlets and fixtures for accessibility
- Grading of ground or exterior areas to provide access to your residence
- Porch lifts and other internal or external lifts
The IRS guidelines only requirement is the medical expenditures have little to no purpose outside of using it as a medical treatment.
So, if your pool is specialized and recommended with a valid medical reason, you could use the Section 105 plan to buy a pool for whatever amount you need. Doing this through your business you will receive a 100% write off as a medically-related business expense.
And the best part is, the tax benefit is immediate and does not require any recapture or a depreciation schedule (link to another article here) saving you even more!