Home Remodeling and Taxes
Repair Vs. Improvement
In order to take advantage of tax breaks associated with home renovations, it’s important to know the difference between a repair and an improvement. The IRS defines a repair as anything that’s necessary to keep your home in good condition but doesn’t necessarily add to its value. An improvement is anything that prolongs the useful life of your home and has the potential to increase its resale value. If you want to take advantage of the available tax perks, your project needs to fall under the home improvement category.
Tax Breaks for Home Improvements
So, if your project qualifies as a home improvement, does that automatically mean it’s tax deductible? Not necessarily. In fact, home improvements are generally not tax deductible. However, there are some exceptions and other kinds of tax breaks that may apply to you, including:
If your home increases in value (whether through appreciation or upgrades) and you turn a profit when you sell, that profit — known as capital gains — will be taxed. However, you can reduce the amount of capital gains taxes you owe by increasing your adjusted cost basis. Your cost basis is what you paid for the home, plus costs incurred (including home improvements). A higher adjusted cost basis means a lower capital gains tax, so be sure to keep receipts and paperwork from home improvements you make to increase your adjusted cost basis when you’re ready to sell.
2) Solar Energy Upgrades
While the tax credits for most energy efficiency upgrades expired in 2016, you can still claim a tax credit for solar water heaters and solar panels through 2021. Currently, the tax credit is 30% of the cost, including installation. The credit decreases to 26% for tax year 2020 and drops again to 22% for tax year 2021. So, if you plan to make solar upgrades, do so sooner rather than later to claim the higher tax credit. Visit energystar.gov for requirements and more information.
3) Medically Necessary Upgrades
Renovations that are made to accommodate a medical disability can typically be deducted on your taxes. Examples include adding a wheelchair ramp, widening doorways, adding handrails or support bars, and installing lifts. There are some limitations, and you must itemize deductions instead of claiming the standard deduction, so be sure to talk to your tax advisor first. You can also check out IRS Publication 502 for further details.
Information obtained from The Federal Savings Bank. Original Post