If you are considering doing some home improvement projects, you might be wondering whether those projects are tax-deductible. Standard 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.
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 tax 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 credit and cost basis is as a homeowner. If you are able to improve your home’s value (capital improvement), you increase your chances of keeping a higher amount of a tax free capital gain by increasing your cost basis of the property.
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 equity, 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.
An important concept to understand regarding a standard deduction 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.
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:
In the past, raising your tax basis through mortgage interest and 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 in the tax season you’re filing for.
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 any expense 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 which home improvement is a deduction becomes much more important.
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:
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 return.
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.
Most homeowners are curious about whether their home improvement project is 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 or closing cost 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. There are also laws on home office deduction that may be of interest to you. 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.