When you renovate a home, the IRS normally doesn’t regard the improvements a deductible expenditure.
Still, it is true, that updates or renovations can be used in various ways to decrease your taxes.
Let’s take a look at the options. First, there is the mortgage on your home.
Making home improvements at the time you buy your home can help you save money on taxes. Your home loan may include additional funds to specifically designated to make improvements. If it does, then your mortgage interest deduction typically receives a boost. What you spend on renovations can be subtracted from your income as part of your standard mortgage interest deduction.
Second, home improvements, made for medical reasons, can be deducted from your income. Typically, these are changes out of a genuine need such as senior living or physical disabilities. These can include:
- the installation of entrance and/or exit ramps;
- updating bathroom facilities;
- making doors and hallways wider;
- redoing cabinets & bringing them to a lower level;
- adding handrails where necessary;
- adding a stair lift, making it easier to ascend stairs.
Bear in mind, “medical expenses” must be reasonable — as they will be scrutinized. If you renovate your entire kitchen to include new appliances, add an overhead vent, and a pot filler, in addition to lowering the cabinets, you’re not able to deduct the entire renovation, just the cabinets.
Assume expenses listed for cosmetic or architectural reasons are not deductible. For instance, even if you want to install a grab bar in the bathroom and to do so requires an architectural change, remember that it can be called into question since, a grab bar could go somewhere else in the bathroom and maybe you’ve chosen a particular spot because it’d be the most aesthetically appealing.
Furthermore, keep in mind that expenditures for renovations simply made to boost your home’s value cannot be deducted.
Third, if you are seeking other ways to reduce your tax bill, a federal tax credit of 30% is available if you install certain energy saving systems in your home. . You can easily receive tax credits by installing:
- geothermal heat pumps,
- solar panels,
- solar water heaters,
- wind turbines,
- and/or energy efficient windows.
One important thing to remember here is that this tax credit has to be taken in the tax year that the improvement was made. It is required also that a Manufacturer Certification Statement accompany any additions made. For more details in this area, go online and look at Federal Tax Credits for Consumer Energy Efficiency.
Improvements can help trim the amount of your sales price counted as profit.
Finally, there is the home sale exemption you may consider. With the home sale exemption, sellers who qualify are not required to pay capital gains on appreciation of their No.1 residence.
This occurs when the primary residence is sold for a profit of $250,000 or less (if filing as single taxpayer) or $500,000 or less (if married filing a joint return). Of course, the basic value of your home increases when renovations are made. The improvements help trim the amount of your sales price that is counted as profit.
The bottom line is that, in many cases, home improvements have the potential to help get the homeowner positioned where he or she can avoid capital gains altogether through home sale exemption.
In summary, home improvements can be seen as a helpful means of reducing your tax bill. It is the wise tax-paying homeowner that stays abreast of tax laws. The home can be your best friend at tax time each year.