3 Best Home Improvement Tax Deductions
In general, there are significant portions of the tax code that help promote homeownership.
The most notable of these tax provisions is the mortgage payment interest deduction, which covers interest paid on the first $1 million of home loans.
This tax deduction is very valuable for first-time homeowners. There are also a few other benefits that can help finance home improvements as well. In particular, home improvement tax deductions help recoup large expenses and add to the long-term value of your home. Of course, deductions, which are based on the current tax code are always subject to change.
TurboTax details some major homeownership tax benefits, however, keep in mind that every individual may have unique circumstances. These homeownership tax deductions are applicable to most people, with a couple of caveats.
Individual Tax Savings
The actual amount of money that you can save on your individual taxes depends on a variety of factors:
- Filing Status
- Standard Deduction Amount
- Other Itemized Deductions
- Taxable Income
Keep in mind that any home-related itemized deductions, plus other itemized deductions must add up to more than the standard deduction or they won't save you any money.
Individual Tax Deductions
Of note, certain things cannot be deducted for a personal residence based on your individual circumstances, such as:
- Homeowners Association Dues
- Home Insurance Payments
- Any Appraisal Fees
- Cost of Improvements
Certain home improvement costs are deductible, however only in the relatively rare case where they qualify as a medical expense.
Although home improvement costs are generally not deductible, it is important to save or record the receipts and track the costs.
The costs can be added to the overall cost of the house (it increases the cost basis). Ultimately, the increased cost basis will reduce capital gains (when selling the home) and therefore, lower your tax bill.
So, if the cost of home improvement projects do not provide any benefits, what are the home improvement tax deductions that will help?
1. Interest on Home Improvement Loans
Frequently, home improvement projects tend to be fairly expensive, which requires homeowners to take out a loan to complete the work. The interest on capital improvements (or large home improvements) is tax-deductible.
A real estate tax attorney details the tax provision:
"A qualifying loan is one that is taken out to add "capital improvements" to your home, meaning the improvement must increase your home's value, adapt it to new uses, or extend its life."
Examples of capital improvements include:
- Bedroom Addition
- Garage Addition
- Installing Insulation
In addition, certain home improvement projects add value to homes compared to other projects. However, the overlap of home projects classified as capital improvements vary in cost.
Tax experts also point out that qualifying loans do not apply to basic repairs and fixes.
Loans for repairs only do not qualify for a home improvement loan interest deduction. Typically, these loans include:
- Fixing Broken Windows
- Replacing Cracked Tiles
For any prospective sellers, certain repairs fall under the selling costs deduction. For those thinking about selling, ask yourself if any repairs can wait. If so, perhaps they fall under the deduction.
2. Home Energy Efficiency Projects
Additionally, tax provisions exist for improving the energy efficiency of your home. In addition, many states also include specific programs to help finance the costs of energy efficiency as well.
The largest home improvement tax deductions applicable to energy efficiency is the Renewable Energy Efficiency Property Credit.
Jayson Mullin, founder of Top Tax Defenders, explains the benefits, which allows homeowners to deduct up to 30% of the cost of equipment and installation.
"You could save up to 30% of the total cost of installing certain renewable energy sources in your home. The 30% credit applies to the cost, including labor and installation, and must be taken in the year the item was placed in service."
Keep in mind that this is a credit, which means it directly lowers your tax bill. Most recently, the credit worked through 2016. As always, consult with a tax professional for changes in the tax code.
There are also a handful of tax credits for purchases of energy-efficient products. For example, there is a 10% credit-based purchases of products such as windows, water heaters and insulation under the Non-Business Energy Property Credit. These tax credits, which were renewed and extended through 2016, maybe retroactive to purchases made in 2015 as well.
Separately, there are state programs that help reduce the cost of making energy-efficient home improvements. While they may not impact your home improvement tax deductions, the programs will help with financing and contribute to saving money on monthly utilities.
For example, home energy checkups identify inefficient areas in your home. High quality energy checkups provide recommendations to address any issues.
3. Business-Related Home Improvement Tax Deductions
The home office tax deduction is a great way to depreciate the home improvement cost for people with a home business.
To qualify for the home office deduction, homeowners must have a legitimate business that uses an exclusive portion of the house for regular business use.
For people that qualify, such as people working from home, deduct 100% of the cost of home office improvements as a business expense.
For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, you may depreciate the entire cost of the project.
However, for any improvements that benefit the entire home, then make a corresponding pro-rata deduction. For example, if you use 20% of your home as an office, then depreciate 20% of the cost.
Another similar provision relates to those that rent a portion of their home. The tax deduction allows for depreciation of any home improvement expense as a rental expense. Deduct the home improvement expense from your rental income. However, like the office example, deduct a pro-rata portion of any improvement that benefits the entire house.
Snappy Electric, Plumbing, Heating, & Air is always here to help.
We can leverage our relationships with utility companies to help process and available rebates and offer financing to help make the necessary improvements today!
For any home improvement projects that require plumbing, electric, HVAC needs or you are interested in reducing your carbon footprint and improving your energy efficiency, then let us know if you have any questions.