Updated Oct 19, 2022
Did you know that some of your home improvements are tax-deductible?
A home improvement project increases the value of your home. Projects such as bathroom remodels, carpet replacements, and cabinetry upgrades are examples of home improvements.
You can potentially score tax benefits on improvements that:
A tax deduction reduces your taxable income and, thus, the amount of money you owe. Whether you’ve done work on a home for personal use or business purposes, those qualifying deductions may shave a few dollar signs off your final owings.
Some homeowners opt for a standard deduction, which is a flat amount the government lets you take off what you owe. Itemized deductions allow you to list the various expenses you incurred that exceeded the standard deduction amount. For some homeowners – especially those who have completed costly home improvement projects – itemized deductions can save them more money.
Before including any deductions on your tax forms, ensure they’re for qualifying home improvements – not home repairs.Home repair projectsrestore parts of your home to their original state or return them to working condition. These projectsaren’t eligible for tax deductions.
Now that you understand what a home improvement is, we’ll dive into which ones are tax-deductible. If you’ve already completed some of these projects or plan to in the next tax year, you may be able to score some serious savings.
You can get tax credits for installing energy-efficient systems and appliances in your home. A tax credit reduces the amount of money you owe come tax season. For example, if you owe $8,000 in taxes and qualify for a $500 tax credit, you’ll only have to pay $7,500.
The Internal Revenue Service (IRS) lists the following home improvements eligible for energy-efficient federal tax credits:
Tax incentives for energy-efficient systems and appliances typically work on a percentage basis, in which you’ll receive a credit for a portion of what the product costs you. View this guide from the IRS for information on claiming your residential energy-efficient property credit.
Home improvements made for medical reasons are typically tax-deductible. If your medical improvement costs exceed 7.5% of your gross annual income, you’ll qualify for itemized deductions for those expenses. The improvements must be made to provide medical care for you, your partner, or a dependent to qualify for a tax break.
A capital improvement project increases your home’s value, extends its useful life, or modifies it for new uses. While you won’t get a tax break on the cost of the improvements, you can save money on taxes if you decide to sell your home.
Improvements you made to your home before selling it ultimately increase your cost basis – the amount you’ve invested in the property. At the same time, such improvements reduce your profit from a potential sale.
For example, if you bought your home for $400,000 and made $30,000 worth of improvements, you’re left with a $370,000 amount you’ll be taxed on. This number, called your tax basis, is your capital investment in the property.
When you sell your home, you’ll pay taxes on the profit you earn minus the amount of your capital improvements. So, if you sell your home for $600,000, you’ll pay taxes on $170,000 since that’s your profit after the sale and your home improvements.
The following items are examples of qualifying capital improvements:
The home office deduction gives self-employed homeowners a tax break on costs incurred to run a business from home. The IRS specifies that to qualify for this deduction, the homeowner must regularly and exclusively use part of their home as a primary place of business.
Qualifying taxpayers can use one of the following options to calculate their home office deduction:
This IRS page provides the forms needed to determine home office expense deductions.
Homeownership involves a lot of number crunching and countless expenses. Luckily, some of the projects that improve your living space may be eligible for tax benefits come filing time. With the information from this guide, you’ll be able to tackle tax season like a pro.
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