Are Home Improvements Tax Deductible?

Disclaimer: The article is collaborative information, and we suggest consulting a tax advisor for validity.

Introduction

Tax season can be a stressful time for so many Americans. Many people look to the federal tax code to try and interpret tax deductions that apply to their situation; however, most home improvements are not considered tax-deductible. There are a couple of instances where tax deductions can be applied for your home renovations, and they are not all that common. This article will cover those renovations and how you can end up with a tax break. We will begin by scrutinizing what tax credits are available.

Tax Credit – Count Me In!

 Taxes are unique, and the available credits can go over your head if you do not actively seek them out. Tax credits are defined as a reduction to an overall tax bill. Some tax credits are refundable amounts, which means that if the amount owed in federal taxes is less than the credit, you will be issued the remaining refund. Not to mention, tax codes change often based on governmental changes, so what was available one year could be gone the next. Below, we’ll highlight what renovations you can seek a tax credit for:

• Solar Panels
• Solar-powered water heaters
• Geothermal heat pumps
• Small wind turbines
• Fuel Cell use on the property

The installation of energy-efficient equipment will be tax refundable based on the Renewable Energy Tax Credit. This tax credit is designed to be applied to personal residences that qualify for the credit, and the amount must equal 26% of the cost of the installed equipment. Also, the installation of the equipment needs to be complete before January of 2021. The amount can be credited towards a primary house of residence and a vacation home. You will need to consider which type of equipment. Fuel cell equipment is limited to a maximum credit of $500 per ½ a kilowatt of the power capacity. This credit is only allowed for a house used as a primary residence. Additionally, this tax credit is not refundable.

• Home renovations made for medical purposes

  • Tax deductions made based on medical expenses related to the following:
    • Diagnosis
    • Cure
    • Mitigation
    • Treatment
    • Prevention of Disease

The tax deductions that can be applied for medical expenses must not exceed 7.5% of the adjusted gross income of the individual or household. The medical expenses that were an out-of-pocket cost that the healthcare provider has not reimbursed are the expenses that qualify for the tax deduction. The way a renovation or home improvements based on this criterion can be used for this deduction is when improvements are made to support a physically disabled person, or equipment is installed for medical reasons. The type of improvements may include the following:

• Construction of an accessible ramp
• Widening of entryways and hallways for wheelchair access
• Installation of handrails in bathrooms, stairways, and wheelchair lifts

The deduction is only applicable if the property’s value did not increase with the improvements for medical needs.

Home Improvement Tax Deductions

Home improvements made to a home over time will not be deductible, but there could be a potential deduction once the home is sold. Single homeowners who sell are eligible to exclude $250,000.00 of the gain from their taxes, and joint-filing couples can exclude $500,000.00. The gain from the taxes is calculated based on the overall total financial investment in the property from the date of purchase. This amount includes the price that the home was purchased for and the amount paid for improvements over the duration of ownership. The improvements that qualify for this deduction need to add value to the house, increase the home’s life cycle, and promote new/modern uses. There are a range of items that can be considered to qualify, such as interior and exterior modifications, the heating and plumbing system, insulation, and landscaping. A general rule is that the higher the tax basis, the lower the gain.

Next, we will look into the tax basis and what that means.

Tax Basis and Capital Improvements

The tax basis is the amount subtracted from the original purchase price to determine the owner’s profit. Capital improvements are adding value to the home and prolong the life cycle, as described earlier. This added value amount and the total paid for the house will become the adjusted basis. Many items that are purchased over time may be considered if records are kept. Improvements should qualify along with expensive items needed for the home – like a security system or a new water heater. The savings during a sale must occur for an owner that had the house for a two-year minimum as the primary residence and an overall five years.

The house can go up in value over the years – making portions of the gain on sale taxable. This can reduce the taxable gain if included in the cost basis of the home. Also, if you are operating a business out of the home or rent a portion of the home out, you might be eligible for an adjusted basis through depreciation. This can mean that the current cost of repairs on the home is deductible within the current tax year, or it can be a depreciated amount under the gain exclusion.

Conclusion

Tax season is a learning experience, and if you know that improvements are needed on your home for energy-efficient equipment or medical needs, be sure to document the costs. Design Everest can assist in documenting those improvement costs and managing the overall project. Their professionals have experience with energy-efficient equipment installation and even items that can be used to get the capital improvement tax deduction upon selling. It is beneficial to have a team that is familiar with the process when investing in these improvements. Home improvement projects may not show a profit immediately, but there are ways home improvement can pay off. Design Everest can work with you to understand the local laws and the needs of the building. Call (877) 959-5914 to get a free quote and consultation today.

Disclaimer: The article is collaborative information, and we suggest consulting a tax advisor for validity.