If you’ve spent a sizable amount of money improving your residence, you may understandably be looking for ways to offset those costs and find yourself wondering if your home improvements are tax deductible. Alas, in most cases, the answer is a clear-cut no. But there are a few exceptions where you may get a tax break that you can further investigate. Let’s take a look at what those exceptions are and what it means for you. You may want to also work with a financial advisor who can help you with all of your tax planning and filing needs as well as help you build your wealth.
Tax Savings for Capital Improvements
Did you renovate your kitchen and do you feel it added value to your home? You can possibly get a tax deduction for that – but not the year that you renovated it unless it also happens to be the year you sell your property. With some capital improvements, homeowners can get tax deductions when they sell their homes for a profit.
That’s because when you sell a home, you may have to pay capital gains tax on the profit. However, many homeowners needn’t worry about that because if you’re a single homeowner, you won’t pay any capital gains tax on the first $250,000 of profit that goes beyond the cost basis (in this case, the cost basis refers to the purchase price of your home).
If you’re part of a married couple, you’ll receive a $500,000 exemption. But if you think you may end up making so much profit that you’ll have to pay a capital gains tax, it might be worth keeping track of any capital improvement expenses you incur while you live in your home and then you can add them to the cost basis of your home.
In other words, if you paid $200,000 for your house and you are single and sell your residence for $460,000, you’ll have made $260,000 in profit and you would have to pay a capital gains tax on $10,000 (the money passed $200,000 sale price and $250,000 of profit). But if you suddenly remember that a few years ago, you spent $20,000 on a renovation that adds to the value of your home, the math works out as if your purchase price was $220,000 and then you’ll have earned $240,000 in profit and not over $250,000.
But in order for this to pass muster with the Internal Revenue Service, you need to keep careful documentation for your taxes and you need to really understand what renovations the IRS considers worthy of a tax deduction and what it isn’t. For instance, adding a new front porch to your home would be considered a renovation that adds value to your home. If your existing front porch has some cracks and you repaired them, or your heating and cooling system went out and you replaced it, those were necessary fixes. While you may feel they add value to your home, the IRS won’t see it that way.
It’s also worth noting that while repainting your kitchen wouldn’t be considered a capital improvement, the IRS will probably feel it is if you have had a natural disaster, like a flood or a fire. If you’re fixing up your home in that way, you can often count that as a capital improvement. But regular maintenance for normal wear and tear is not considered tax deductible.
Home Improvements for Proper Medical Care
There are a lot of reasons you may need to improve your home for medical reasons. You may have had some health challenges in recent years or you may just be slowing down. If you make improvements to your home to accommodate your health, you may be able to deduct those modifications on your taxes, provided you itemize your deductions. Some examples include:
- Installing a chair lift to help you or a family member get up the stairs.
- Construction of a wheelchair ramp to the front entrance.
- Widening doorways for a wheelchair.
- Installing grab bars and handrails throughout the house.
These costs can get tricky to determine what qualifies as a deduction and that’s why talking this over with a tax advisor would be well advised. For instance, if you install grab bars in a shower and then decide it looks out of place with the room and you need to redesign your bathroom, the Internal Revenue Service will likely take the costs of installing the grab bars as a deduction but would probably disapprove including your renovation expenses.
You may be able to write off some home improvements that will make your home energy efficient. This can change year to year so it’s best to check with the IRS and your tax preparer if you have one and there are a number of different types of tax credits that you may qualify for, but generally qualifying properties include solar roof panels, solar water heaters, geothermal heat pumps, small wind turbines and fuel cells.
The Bottom Line
Owning a home can be expensive and there isn’t much way to get around that. There is always a lawn to mow unless you are living in a condominium or penthouse. When there are repairs to be made, you have to pay for those instead of a landlord. But when it comes to investing in your home, rather than maintaining it, the IRS will generally give taxpayers a break. It’s kind of heartening if you think about it. Your home is your most valuable asset and the IRS is trying to make sure you earn as much money as you can from it.
Tips for Tax Planning
- Working with a financial advisor can help you be more prepared to take advantage of deductions you qualify for or to help you just reduce the amount owed. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- In order to estimate how much you may owe in taxes, use SmartAsset’s free income tax calculator so that you can properly prepare for upcoming tax filings.
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