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Are Home Improvements Tax Deductible?

If you are considering doing some home improvement projects, you might be wondering whether those projects are tax-deductible. Tax deductions can have a big impact on your overall tax burden, so gaining a firm understanding of what home improvements are tax deductible is sensible for all homeowners.

How Do Tax Deductions for Home Improvements Work?

Are home improvements tax deductible? Unfortunately, expenses made making home improvements aren’t deductible because they are considered personal expenses. This doesn’t mean that making improvements to your home can’t bring tax benefits. The tax benefits of home improvements are gained when you sell your home, rather than in the year that you spent money on the project.

To understand how this system works, you’ll need to understand the terminology used by the IRS to classify different types of home projects, as well as gain a sense of what your tax and cost basis is.

Improvement Versus Repair

One thing that gets confusing is whether a project around your house is an improvement or a repair. While these two terms have a similar meaning in an everyday sense, there are big differences when it comes to reaping your tax benefits.

Improvements can be primarily thought of as projects that add value to your home, although it can also be a project that adapts your primary residence to a new use or improves the life span of your home. Which home improvements add value to your home? Kitchen, plumbing, or bathroom upgrades are all considered home improvements because they increase the selling price of your home.

In contrast, a repair is something that may be necessary but doesn’t add value to your home with no profit as a result. There’s no comprehensive list of what qualifies as a repair, but some easy examples are replacing a drafty window, fixing a broken water heater, or repainting a room.

What is Your Tax Basis?

An important concept to understand regarding tax deductions for home improvements is your tax basis. Your tax basis is the amount of money that you subtract from your sale price to determine your profit.

  • If your tax basis for a house is $200,000 and the selling price for your house is $300,000, your profit will be $100,000.

Each home improvement you make as a homeowner can be added to the tax basis of your home. Let’s look at an example of how this works in action:

  • You bought your home in 2010 with a purchase price of  $100,000. You installed a new roof for $20,000 and expanded your home’s livable space with a finished basement for $30,000. In 2019 you sold your house with a selling price of $225,000. Your tax basis when you sold your house is the $100,000 you initially paid for it, plus the $50,000 for the roof and the basement. To calculate your profit from the house, you would subtract your tax basis ($150,000) from your final selling price ($225,000), resulting in a final profit of $75,000. This final profit is the taxable portion of the sale for the IRS.

Weighing the Tax Benefit of Home Improvements

In the past, raising your tax basis through home improvements was one of the most effective ways to reduce your tax rate from selling your home. Recent changes to the law made this less necessary in some situations.

The current tax law stipulates that if you lived in your home for two of the five years before the real estate is sold, you won’t have to pay taxes on the first $250,000 of profit for single filers and $500,000 for married-filing jointly filers.

So, if you are a single filer and anticipate receiving less than $250,000 in profit off of your home sale, you likely won’t see a benefit from including expenses from home improvements in your tax basis. The same can be said for married filers if their profit from the sale is less than $500,000.

The tax benefits of home improvements are much more likely to be a factor if you have lived in your residence for a long time and home real estate sales have steadily risen in your area. In this case, it is conceivable that some portion of your profit would be subject to taxes and understanding if are home improvements tax deductible becomes much more important.

What Home Improvements Are Tax-Deductible When Selling?

Here we’ll provide a list of what home improvements are tax deductible when selling. There is no comprehensive list available, so it is important to remember that in order to be considered an improvement, the project must add value to the home and ultimately increase the profit of the sale. Here are a few of the most common home improvements ideas:

  • Bathroom remodel
  • Kitchen remodel
  • New roof
  • New air-conditioner
  • Adding a swimming pool
  • Adding a finished or unfinished basement
  • An addition
  • Water filtration system
  • Water softening system
  • Reverse-osmosis drinking water system
  • Energy-efficient water heater
  • Energy-efficient windows
  • Home security system
  • Drought-tolerant landscaping

The list of projects that can increase the selling price of your home is fairly extensive. One thing to keep in mind is that the improvement you make must still be present when you sell your house to be valid. For example, if you upgrade your air-conditioning unit, that same unit needs to be present when you sell the house in order to be added to your tax basis.

Prioritizing Improvements That Add Value

Due to the recent changes in how homeowners’ sale profits are taxed, it can be a good idea to prioritize improvements that increase the selling price of your home. Unless you anticipate a profit exceeding the tax exemption threshold of $250,000 for single filers or $500,000 for married filers, your focus will probably be on improvements that add value rather than the tax benefit those improvements provide. 

  • Improving Your Square Footage – Increasing the size of the livable space in your primary residence is one of the most effective ways of adding to the value of your home. Many people do this by building an addition or by adding a basement. These improvements can serve as a strong attraction for prospective homeowners that are looking for the biggest bang for their buck.
  • Boosting Your Curb Appeal – Making your house more visually appealing for potential homeowners is a tried and true method of adding value to your home. Consider giving your house a fresh coat of paint, so long as you are willing to do it yourself. Paying a professional might not offer a worthwhile return. The same is true for updating your landscaping. Professional landscaping can be expensive, but transitioning to low-maintenance plants that require less water can be attractive for environmentally conscious consumers.
  • Update Older Systems – Updating the core mechanical systems of your house, such as your plumbing, heating and air conditioning, and electrical can be beneficial for boosting your home’s value. Improving older systems can help alleviate the concerns of potential homeowners who may be worried about substantial repairs in the first few years of homeownership.
  • Offer Quality of Life Improvements – Many homebuyers are attracted to features that can help them reduce costs or maintenance when they move in. An example of an improvement in this category is installing a water softening system for your house. Water softening systems ensure that your appliances will maintain efficiency longer while eliminating unsightly and annoying soap scum and limescale. Installing a drinking water filtration system, whether for your whole house or under your sink with a reverse osmosis system, can be a strong attraction for discerning consumers.
  • Bathroom and Kitchen Remodeling – Remodeling your bathroom and kitchen are two of the most effective methods of improving your home’s selling price. If you do so, replace older appliances with newer energy-efficient appliances. Matching appliances are an added bonus. In your bathroom, changing out your toilet, sink, and fixtures can breathe new life into a dated room.

Final Thoughts

Most homeowners are curious about whether their home improvements are tax-deductible. While home improvements aren’t tax-deductible in the year that they are done, they can be added to the value of your primary residence to raise your tax basis. Your tax basis is subtracted from your final selling price to determine your profit.

Although it was incredibly important to track your home improvement expenses in the past, recent changes to the tax law made it less of a priority. If the profit from your home sale is less than $250,000 for single filers or $500,000 for married filing jointly filers, you won’t face a tax penalty on your profits. If your profit exceeds those thresholds then including your home improvements in your tax basis makes sense. 

Under the current law, it makes sense to prioritize home improvements that increase the selling price of your home. These include improving the size of the living space in your home through an addition or basement or renovating your bathroom or kitchen. Improvements that add to the quality-of-life of the occupant, such as a water softening system for your whole house attract potential homeowners by reducing maintenance requirements and ongoing costs. 

To learn more about the benefits of water softening and filtration systems, contact Rayne Water today.

Sources

  1. https://turbotax.intuit.com/tax-tips/home-ownership/home-improvements-and-your-taxes/L6IwHGrx6
  2. https://turbotax.intuit.com/tax-tips/home-ownership/tax-aspects-of-home-ownership-selling-a-home/L6tbMe3Dy
  3. https://www.nolo.com/legal-encyclopedia/what-home-improvements-tax-deductible.html
  4. https://www.hrblock.com/tax-center/filing/credits/home-renovation-tax-credit/