When you take on a home renovation project, the costs generally accumulate pretty quickly. Unfortunately, the federal government doesn't lighten your financial burden with a tax deduction. The reason for the lack of deduction is the fact that most home renovations will increase the value of your home. Since your home is a capital asset, this value increase may save you some capital gains tax if you ever sell it.
Renovations Increase Basis
When dealing with a home, or any capital asset for that matter, every dollar you spend on the purchase price and home renovations will increase your tax basis in the property. Keeping track of your tax basis is extremely important since you will use the number to calculate your taxable gain when you sell the home. The tax basis of homes commonly include the purchase price, most of your closing costs and the cost of all home renovations you make before you sell it. If you do the renovations yourself, you can include the cost of purchasing all materials and supplies. However, when you hire someone to do it for you, you can also include the cost of labor.
Excluding Repairs
It is important that you can distinguish between repairs and renovations when increasing your basis. A repair is something that simply maintains the home rather than improving it. For example, replacing a piece of aluminum siding on the exterior of your house is a repair, whereas, installing new aluminum siding for the entire house is a renovation. When you make repairs, there is never any tax savings since it neither increases your basis nor is deductible. In contrast, your home renovation will increase you tax basis if the project increases the value of the home, prolongs its useful life or makes it suitable for a different use.
Energy Credits
There is one way you can receive some immediate tax savings for your home renovations. If you make improvements to your home that include installing solar-powered equipment, wind turbines, geothermal heat pumps or fuel cell property equipment, you may be eligible for the residential energy efficient property credit. This credit provides you with a dollar-for dollar reduction of your tax bill in the year you complete installation of any of the alternative energy equipment -- equal to 30 percent of your purchase and installation costs. If you qualify for the credit, the IRS requires you to prepare an IRS Form 5695 and attach it to your return.
Reducing Capital Gain
You can finally see some tax savings for the cost of your home renovations when you sell the home. Since you will recognize taxable gain on the amount of the sales price that exceeds your tax basis, the less capital gain you will pay to the IRS. However, if you use the home as your main home, you may be eligible for a $250,000 to $500,000 capital gain exclusion. In this case, it's unlikely you would see any additional tax savings for your home renovations unless your profit or gain exceeds the exclusion amount.
Tags: your home, your basis, home renovations, will increase, your home renovations
