Are home improvements tax deductible? This question is of interest whenever selling your home. Home improvements entail upgrades done to your home to substantially add value, increase its useful life, or adapt to new uses. A tax deduction is a reduction in income subject to federal and state income taxes. Note that whenever something is tax deductible, it reduces the income tax bill through the reduction of taxable income.

To qualify for a tax deduction, the home improvement should be capital, as stipulated by the IRS. An upgrade is a capital improvement if it adapts your home to new uses, prolongs the useful life of your home, or adds materially to the value of your home.

However, home improvements may not help homeowners in their taxes when selling their home since they do not keep receipts of any upgrades done. This is why we recommend keeping track of what you paid in the home improvements to justify the selling price and for potential tax savings. We hope that this article has adequately addressed the question: are home improvements tax deductible?

WHAT IS HOME IMPROVEMENT?

 

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Home improvements include any work done on your home to add to the value of your home, to increase its useful life, or adapt to new uses. It includes adding new rooms, new bathrooms, fencing, decks, walkaways, wiring upgrades, driveways, landscaping, new roofs, plumbing upgrades, and kitchen upgrades.

This implies that home improvements entail upgrading an existing home interior, for example, plumbing and electrical, exteriors, such as roofing, concrete, masonry, and siding. It may include other improvements to the property, such as garage maintenance and additions or garden work.

Improvements increase the comfort level of your home. Upgrades that can improve comfort include HVAC systems, room luxuries, such as a hot tub spa to a bathroom, or increasing the capacity of electrical and plumbing systems. Other upgrades that may improve comfort include soundproofing baths and bedrooms and waterproofing basements.

Maintenance and repair projects that are deemed as improvements include replacement of new construction windows, roof replacement, concrete and masonry repairs to the chimney or foundation, repainting walls and fences, and repairing electrical and plumbing systems. Upgrades also include putting in place additional space. This may include turning marginal areas into livable spaces. For instance, you can turn basements into home offices, home theaters, or attics.

You incur a lot of expenses, which may be of interest when selling your house. So are home improvements tax deductible? To answer this questions you must understand what home improvements are tax deductible. You may also want to know what tax deductions are, which will be explained in detail in the next section.

WHAT ARE TAX DEDUCTIONS?

 

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A tax deduction is a reduction in income subject to federal and state income taxes. When the total taxable income is decreased as a result of a tax deduction, the amount of income tax you would have owed is reduced. The deductions are because of business-related expenses, but they are an avenue for the government to provide incentives for individuals to take part in activities that result in a greater societal benefit.

Whenever something is tax deductible, it reduces the income tax bill through the reduction of taxable income. While many people consider tax deductions as a tool used by the rich, it is a mistake since there are plenty of deductions available to lower- and middle-income families. So are home improvements tax deductible? Yes, they are deductible and the next section summarizes home improvements that are tax-deductible.

ARE HOME IMPROVEMENTS TAX DEDUCTIBLE?

 

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The federal tax law that President Trump signed on December 22, 2017, may affect your homeownership tax benefits as described in this article. The new law came into effect this year and does not affect tax filings made in the 2017 tax year.

Home improvements typically come into play when selling your home as they are included in your home’s adjusted cost basis. The bigger your basis, the smaller you stand to gain capital, which means fewer taxes if your home sale profit exceeds $250,000, or $500,000 when filing jointly. This implies that home improvements are tax deductible, but there are special conditions you should meet. Note that if it is your personal residence, you are not eligible for the deduction.

Are home improvements tax deductible? To qualify for a tax deduction, the home improvement must meet the following conditions:

  • Adapt your home to new uses
  • Prolong the useful life of your home
  • Add materially to the value of your home

For many individuals, even major home improvements will not help their taxes after the home is sold. However, keep track of what you paid in the home improvements over the years, not just for justifying the selling price but also for potential tax savings. This implies that if you plan to live in your house for a long time or make significant upgrades, you may be interested in saving all the receipts. It is a smart move since you may need to resell it and save on tax deductions.


WHAT HOME IMPROVEMENTS OR UPGRADES ARE TAX DEDUCTIBLE?


There is a variety of home improvements eligible for tax deductions include:

  • New bathroom
  • New addition
  • Basement finishing
  • New furnace
  • Master suite addition

Even though you may consider all the work you do to your home as an improvement, the IRS may view it differently. As a rule of thumb, a capital improvement increases the value of your home, while a non-eligible repair just returns something to the original condition. For the IRS to consider a home improvement a capital improvement, it has to last for over a year and add value to your home, adapt it to new uses, or prolong its life.

A capital improvement includes everything from a new bathroom or deck to a new furnace or heater. All capital improvements eligible for tax deductions are enlisted in Page 9 of IRS Publication 523. There are a few limitations in that the improvement should still be clear when selling your home. Therefore, if you put in place wall-to-wall carpeting for over 10 years and then replaced it with hardwood floors five years ago, the carpeting cannot be counted as a capital improvement.

Additionally, a repair like fixing sagging gutters or painting your house will not count. According to the IRS, repairs are things done to maintain a good condition of your home without prolonging its life or adding value.

Repairs and capital improvements are easily distinguished. For example, if you replace a few asphalt shingles on your roof, it is a repair. Replacing the entire roof is a capital improvement. The same applies to windows. Replacing a broken window is repair, but putting in place new ones is a capital improvement. There is one exception though. If your home is damaged by a natural disaster or fire, everything you do to restore it to its original condition counts as a capital improvement.


HOW CAPITAL IMPROVEMENTS AFFECT GAINS


To figure out how capital improvement affects your tax bill, you need to know your cost basis. It is the amount of money you spend buying or building your home, which includes all costs you paid at the closing, such as lawyer fees, survey charges, transfer charges, and home inspection—just to name a few. You need to find all the costs on the settlement statement you received at your closing.

After accounting for the cost basis, you need to account for any subsequent capital improvement. For example, if you bought your home at $100,000 inclusive of all closing costs, this is the initial cost basis. Then you spend $50,000 on kitchen remodeling. The adjusted cost basis will be $150,000. If you lived for about two years of the last five, the profit you’ll make on reselling will be taxed as long-term capital gain. For example, you sell it at $425,000, the capital gain will be $275,000, you get an automatic exemption of $250,000. You will have significantly saved based on the 15% tax rate for capital gains.


BASIS BUSTER SITUATIONS


Some situations may lower your basis, which increases your risk of facing a tax bill when you sell. You should consult a financial advisor. Begin asking: are home improvements tax deductible? The situations are listed below:

  • If you use the actual cost and take depreciation on a home office, you need to subtract the deductions from the basis
  • The same applies to depreciation because you rented your house
  • Subtract subsidies from utility companies for making energy-related home improvements
  • Subtract subsidies for energy-efficiency tax credits you have received
  • If you bought your home by using federal tax credit for first-time buyers, it should also be deducted from your basis

CONCLUSION

 

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Are home improvements tax deductible? This question is of interest whenever selling your home. Home improvements entail upgrades done to your home to substantially add value, increase its useful life, or adapt to new uses. A tax deduction is a reduction in income subject to federal and state income taxes. Note that whenever something is tax deductible, it reduces the income tax bill through the reduction of taxable income.

To qualify for a tax deduction, the home improvement should be capital, as stipulated by the IRS. An upgrade is a capital improvement if it adapts your home to new uses, prolongs the useful life of your home, or adds materially to the value of your home.

However, home improvements may not help homeowners in their taxes when selling their home since they do not keep receipts of any upgrades done. This is why we recommend keeping track of what you paid in the home improvements to justify the selling price and for potential tax savings. We hope that this article has adequately addressed the question: are home improvements tax deductible?