Home Improvement Projects that Can Save You Money at Tax Time
Owning your home has a lot of valuable tax benefits compared to renting: you can deduct your mortgage interest and real estate taxes, and in certain circumstances be shielded from the capital gains tax when you go to sell your home. But did you know that you can also get additional tax benefits for certain home improvement projects?
Improvements and Upgrades, Not Repairs, Take the Sting Out of Home Sales
In general, home improvement projects that significantly upgrade your home (opposed to repairs, like fixing a leaky roof after a bad storm) are added to what’s known as your home’s basis. Basis is calculated by starting with the purchase price of your home along with any other conditions of the purchase such as closing costs, then you add upgrades and improvements over the years such as decks, separate structures on your property, or additional rooms.
You will need to know your home’s basis when you go to sell your home. You may qualify for what’s known as the “excluded gain” which shields you from up to $250,000 of capital gains on the profit from the sale ($500,000 if married filing jointly) so you must keep detailed records of your home purchase, improvements and additions, and home sale to see if you will benefit from this tax provision.
Medically-Necessary Home Improvements Can Result in Tax Breaks
You can take a deduction for qualified medical expenses with a threshold of 10% of your adjusted gross income. Most people often can’t take the medical deduction because they don’t have enough expenses between themselves, their spouses, and dependents. However, home improvements that are designed to treat a medical condition carry a huge price tag and can result in some major tax savings.
If you, your spouse, or dependent is a wheelchair user for instance and you are having exit ramps built, it is a deductible medical expense along with widening doors and modifying bathrooms. Handrail installation for mobility-related impairments would also be allowable. In general, the improvement must have a bona fide medical purpose and not be installed to increase the value of your home. While installing a swimming pool may seem like a tempting home improvement as a medical deduction if your physical therapist recommends swimming instead of more traditional exercise, it wouldn’t pass the test.
Making your home easier for an elderly and/or disabled resident to live in wouldn’t necessarily increase the property value and so long as the deduction isn’t considered egregious, you can deduct a significant part of these accessibility-related improvements as a medical expense.
Energy-Conserving Home Improvements That Qualify for Tax Credits
You can save some green by going green: using green technology and green energy, that is.
The Residential Energy Credit has various provisions for different types of energy generation. It is a federal tax credit that gives you back 30% on solar panels, small wind turbines, geothermal heat pumps, and solar water heaters. This includes labor and installation on existing homes and ones under construction. There is no maximum on the residential energy credit so if you spend $10,000 on a qualifying wind turbine, you immediately get $3,000 as a nonrefundable credit in the year it was placed in service. Fuel cells are eligible for the credit but have a maximum amount and can only be used on your primary residence.
There must be a Manufacturer Certification Statement accompanying g the device and most of the items listed above are eligible through 2016 except solar panels which are credit-eligible through 2019. Solar credits are then reduced until 2021. However, improving your home with solar energy can still result in a significant tax break despite this phase-out.
Additionally, depending on the state in which you reside or where the home is located, there are often state-level tax incentives for residential green energy investments.
Whether you’re a homeowner of several decades or a first-time homebuyer, Rue & Associates is here to assist you with all tax matters relating to home improvement projects and making green energy investments for your home. Please contact us today to speak to one of our friendly and professional tax law experts.