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A person’s home is their castle, an old adage says. That’s why most Americans are eager to purchase their very own property and keep it in tip-top shape once it’s in their possession.
For certain, so many of us spend a good portion of our hard-earned dollars each year sprucing up our houses to make them more livable or to improve how they look and how they function. In most cases, it’s money well spent and sometimes the perks of those improvements come back to you when you’re ready to sell and move on to your next “castle”.
If you’re considering a major home improvement or several smaller improvement projects, you may be wondering if you can “write off” these improvements on next year’s tax returns or how and when you can reap the financial benefits of these improvements.
Generally speaking, most home improvement expenses cannot be deducted from your federal taxes, with just a few exceptions. However, if you structure it correctly, there are ways you can use home renovations and improvements to minimize your taxes.
For example, if you want to make improvements at the time of purchasing your home, you can – in many cases – take out a mortgage that includes additional money for those projects. As such, you’ll be able to deduct the interest from that extra amount at the time you file taxes as part of your mortgage interest deduction.
If you make improvements to your home that are medically-necessary, those can be deducted from your income as medical expenses. This might include projects that, for example, would make your house accessible to someone in a wheelchair or otherwise impaired as far as walking is concerned. Building entrance and exit ramps, widening doorways and hallways, lowering cabinets so they can be reached from a wheelchair, installing an elevator or stair lift, and modifying bathrooms can all be a part of such a project. Deduction amounts must be considered “reasonable” and you should keep concise records regarding money spent on the project, including materials and labor.
Improvements to a home office can also be tax deductible during the year they are completed as long as they are limited to the area of your home that you use for the business you own. Remember, you must be a self-employed business owner to take advantage of such a tax deduction, not just someone working from home for someone else.
Finally, you can earn “tax credits” from installing qualified energy generating systems in your home. When you choose systems that comply with the federal requirements for consumer energy efficiency, you can take a tax credit for the year during which the item or items were placed in service. A 30 percent credit on the cost of solar panels or solar water heaters, geothermal heat pumps, small wind turbines, or fuel cells may be available to consumers. The credit applies to the total cost, which includes not only the system but also the labor and installation expenses associated with it. So, for example, if you spend $40,000 to install solar panels on your house, you’ll get an immediate credit of $12,,000 on that year’s taxes and also reap the benefits of a reduced energy bill each month.
Of course, when you sell your home, you might be able to get some tax breaks from improvements you made while you lived there. When you sell your house, you’ll hear the term “tax basis”, which refers to the profit you make on the sale. If you’ve kept good records on the home improvements you’ve made, you can deduct them from the tax basis and will, therefore, be taxed on a smaller amount of profit. Sound confusing? Your real estate agent or lawyer should be able to help you with tax basis specifics so that you’re paying taxes on the right amount.
So, while immediate write-offs are rare except in specific circumstances, home improvements can still provide tax benefits in the long run. While this article provides the basics, it’s good to research your projected improvements carefully before you begin to be sure they qualify for particular tax breaks.
Mr. Cabinet Care’s design team and incredible craftsmen have your best interests at heart. From design to installation our team is ready to help you achieve the kitchen of your dreams, faster than you can imagine.