How Renovating Your Home Affects Your Taxes
As a homeowner, taxes can be confusing. Here are a few tax credits and deductions that you may qualify for.
Selling Your Home
Although home improvement costs are considered a personal expense that cannot be deducted from your taxes, they still have a tax benefit by adding to your home’s tax basis and reducing the amount of taxes owed when you sell your home. Allow us to explain. A tax basis is the amount you subtract from the total sales price of your home to determine your profit on which you will be taxed. Remember, the first $250,000 (or $500,000 for married couples who file jointly) of the profit from the sale of your home is tax-free if you have owned and lived in the home for at least two of the five years leading up to the sale. The gain from this profit is taxable if it exceeds these amounts; losses on the sale of your home are not deductible if your home is strictly used for residential purposes.
However, home improvement costs are categorized as either improvements or repairs by the IRS. What’s the difference? An improvement is considered anything that increases your home’s value, life or use that is still evident when the home is sold. A repair is considered anything that restores something to its original condition. Improvement costs are added to your home’s tax basis; repair costs are not. There are some exceptions, however. Some repairs can be counted toward your tax basis if they are a necessary part of completing a larger remodeling project or if you are restoring your home after a fire.
According to IRS Publication 523, the following improvements may be used to increase your tax basis:
Additions. This includes additions or expansions to your home that were not part of the original home you purchased such as bedrooms, bathrooms decks, garages, porches and patios.
Grounds and landscaping. This includes a new lawn, xeriscaping, driveways, walkways, fences, in-ground pools or retaining walls.
Home systems. This include installing heating and central air conditioning, furnaces, duct work, security systems, upgraded electrical wiring, water and air filtration, central vacuums, sprinklers, water heaters and new pipes.
Exterior improvements. This includes installing new siding, windows, doors, a roof, and even a satellite dish.
Interior upgrades. This includes flooring, built-in appliances and kitchen upgrades.
Insulation. This includes pipe insulation, duct work, walls, attic and floors.
Although home improvement costs are not tax deductible, they can be depreciated by deducting the cost over several years only if your home is used for more than just a personal residence such as having a home office.
Depreciating Your Home
You can depreciate your home improvement costs if you use a portion of your home to exclusively and regularly run a legitimate business or an office. You can deduct 100% of the cost of improvements you make to your home office if you qualify for the deduction and meet all home office guidelines. Remember that to count as a home office, it must be a space that the rest of the family does not use recreationally. Improvements that benefit your entire home are also depreciable by the percentage of your home office use. For example, if you use 10% of your home as an office, you may depreciate 10% of the cost to upgrade your home’s heating and air conditioning system.
Essentially renting out a portion of your home is also like having a home office when it comes to taxes. If you incur home improvement costs for a portion of your home that you are going to rent out, then you can depreciate the costs as a rental expense, which is deducted from the rental income you receive.
Mortgage & Loans
Your real estate taxes, interest from your mortgage and mortgage insurance premiums can all be deducted from your taxes; you can also deduct your property tax. If you take out a loan to make improvements (not repairs) to your home, you can deduct that interest on your taxes. Interest from home equity lines of credit (HELOCs) and 203k mortgages are also deductible.
If an improvement needs to be made to your home for medical purposes and necessities, you can deduct that cost on your taxes as a medical expense. This can include things like exit ramps, modifying bathrooms for handicap needs, lowering cabinets, widening doors, widening hallways and adding handrails. If any of these costs also help to increase your home’s value then they cannot be claimed as medical expenses.
According to IRS Publication 502 the following items are considered true medical expenses:
Grab bars and railings
Lowering kitchen cabinets
Modifying door handles
Prior to 2017, there was a number of energy efficient home improvements you could make that were given a tax credit. The only energy-saving home improvement you can still write off until 2019 is solar technology such as solar water heaters and solar panels. Although this credit can only be used for the year the technology was installed, the costs can be depreciated every year until 2021. The credit can also be applied to items installed in vacation or second homes. The credit allows you to write off 30% of the cost of any solar technology you're adding to your home, this applies to the labor/installation as well with no maximum limit.
Casualties, disaster and theft losses can all be deducted on your taxes. As stated earlier, this doesn’t necessarily include the cost of improvements and repairs, but it does help. Unless declared otherwise by a federal mandate, the loss must be claimed for the year it occurred. If you are being reimbursed by your insurance or any other benefit program then you cannot deduct the costs either.
If you have to move for work purposes, you can qualify for certain deductions for your moving expenses as long as your new home is more than 50 miles away from your old home and your moving date is within a reasonable amount of time of your start date. These deductions include transportation, lodging, storage and shipping.
NOTE: We do not intend to take the place of a tax professional. Always speak with a qualified tax preparer about which deductions and credits you qualify for and what updates the tax code has undergone that may affect you.