Deduct Home Improvements On Taxes – Not every home improvement can be written off on your taxes, but there are some smart ways that home improvements can provide tax benefits. Alistair Berg/Getty Images
But wait! No need to turn off your computer in disgust and walk away just yet. Even though the cost of common, tough improvements aren’t deductible on your return, there really are some smart ways to recoup some of your housing costs by knowing the ins and outs of a tax return. From energy efficiency upgrades to improving the parts of the house you use as a home office, we just might find a deduction for the work you’ve put in.
Deduct Home Improvements On Taxes
Let’s start by looking at a good example of finding an “improvement deduction” in the middle of another write-off: your mortgage.
Top Tax Deductions For Homeowners
Where do the renovation budgets come from? Well, often they are scraped together from savings – and possibly a loan or two. None of these are going to help you in the tax department. As we said, home improvements can’t be written off like tax preparation fees or medical expenses (although we’ll see later how medical expenses can lead to home improvement deductions).
One way you can smartly deduct from your renovation budget is to roll it into your mortgage when you buy a house. This may not seem like the most brilliant plan; after all, you’re still paying for the cost of repairs, and getting a bigger mortgage to cover those repairs means paying more in interest. But remember that if you itemize your deductions, you can write off the cost of the mortgage interest. Add the cost of improvements to your mortgage and the amortization can increase.
Single and married savers can deduct mortgage interest on the first $750,000 of debt, while married-but-filing-separated people can deduct interest on up to $375,000 apiece. Also, note that you can deduct interest paid on a home equity loan if it was used to build or “substantially improve” a home [sources: IRS].
While some of the tax credits for energy efficiency improvements expired in 2013, there are a couple of ways to reduce your energy footprint while still getting some tax savings.
Video: Home Repairs And Tax Deductions
One is a tax credit for energy efficient systems in your home. It’s a one-time credit (meaning you can’t take it every year), but it allows you to write off 30 percent of the cost of solar, geothermal, wind, or fuel cell technology you add to your home (the fuel). cell technology only applies to a primary home), as long as it was in operation by the end of 2019. Even cooler is that the 30 percent applies to labor and installation as well as the product itself. After that, however, the credit gradually decreases, so that improvements in the service in 2020 get 26 percent, and those in 2021 get 22 percent. [sources: Perez, TurboTax.]
You can also take out a non-commercial property line of credit to install home insulation, replace exterior doors, or replace a furnace, among other things. The credit is 10 percent of costs, with a maximum of $500 from 2006 to the present. There are also many other caveats, which you can find in this TurboTax article.
So this one is a little hard to wrap your head around, but stick with us: When you sell your house, you may be able to get some tax breaks from improvements you made before the sale. Now on the surface this seems like exactly what we told you was impossible: a tax break on a home improvement. But it’s a bit more complicated than that.
When you sell your house, the term “tax basis” refers to the profit you make. And the idea is that any improvements you make to the house while you own it reduce the profit, giving you less to be taxed on. Please note that if the home is your primary residence and you have lived there for more than a year, you will only be taxed on the profit you make from selling a home if the gain is over $250,000 for a single person or $500,000 for a married couple filing together [source: IRS].
Tax Deductions For Accessible Home Modifications
So if John buys a home for $500,000 and makes $50,000 in improvements, his tax basis is now $450,000. If he sells the home for $900,000, he pays tax on the $350,000 profit – not $400,000. Remember, he’ll still be able to deduct the $250,000 that won’t be taxed from that amount [sources: Anspach, Fishman].
So, here’s a deduction for home improvements, which admittedly is kind of a stretch on the use of the word “home.” But since many people run a business on a property they own or rent, it seems like a good idea to point out some ways you can deduct property improvements as a business expense.
Again, this applies to improvements you make to a property that you use for business. You don’t have to own the land or the building; Renting works too. But you need to know the difference between a repair and an improvement, because the rules are slightly different. If you make a repair, you can deduct the cost as a business expense – quite simply. But if you’re doing an enhancement, it’s a bit more complicated. You must depreciate the cost of the improvement over its useful life [source: IRS 946]. So you can deduct the cost of fixing the cracks in the parking lot, but if you replace the entire parking lot, you’ll probably have to write off the cost over several years.
Another home improvement that might deserve quotation marks around “home”: any improvements you make to your home office. In the same way as deductions for business expenses you can make for any improvements to the property you own or rent, the home office is considered a place where any improvements or repairs are subject to deductions.
Mortgage Interest Deduction Or Standard Deduction
But let’s be careful. Remember that you can’t just claim your old space as a home office; you must meet some strict requirements from the tax authorities (ie it cannot be a space that the rest of the family use in their spare time). The improvements to a home office are fully deductible, as long as 100 percent of the space is used exclusively as an office. Just remember that you’ll probably have to write them off too, unless they’re repairs.
And here’s an added bonus. Let’s say you’re adding an air conditioner or a new water tank to your home. If you use 15 percent of your home for office space, you can write off 15 percent of the cost [source: Fishman].
Owning another property that you rent out is not that different, tax-wise, from owning a business. (That’s according to the IRS. You might point out that your real job would never require you to get up in the middle of the night to fix a toilet that backed into the bathtub. Unless it’s really your job, in which case just a glutton for punishment.)
Similar to a home office, you can write off the cost of repairs to your rental property and then write off improvements. It’s pretty basic, and cool enough. But consider that if you rent out part of your own home, it works as the home office deduction. You can write off the cost of “your” home improvement if it’s in the rental area, and you can write off improvements for the percentage of the space used for rent [source: Fishman].
Common Tax Deductions You Might Be Missing
It’s not exactly the kind of home improvement you plan with paint chips or blueprints, but the fact remains that losses, accidents, disasters or theft can be deducted on your tax return when appropriate. No, it won’t let you deduct the cost of repairs or improvements, but getting a break on the damage or loss can be helpful when budgeting for restorations.
First, to qualify to claim casualty losses from a natural disaster, the disaster must be a “federally declared disaster” by the president of the United States [source: IRS 515].
Second, remember that you must itemize your deductions to write off any losses; it means that you cannot take the standard deduction on your return. Also remember that you generally have to take the loss in the year the event occurred – unless specified by a federally declared mandate. You can then claim it as a previous year’s loss. (It makes sense if the disaster strikes in January and you file your taxes in April, for example.) And don’t forget: You can’t deduct expenses if you’re reimbursed for insurance or another benefit program [source: IRS 515].
Although not directly related to renovations, it is important for homeowners to remember that they can deduct property taxes on their returns. Now remember that property taxes are not going to show up on your W-4; usually people include their property taxes
Top Homeowner Tax Deductions That Decrease Your Tax Burden
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