Upgrading your kitchen may save on capital gains taxes but not on income tax.
You can't usually claim home improvements as a tax deduction. While there are some special improvements that you can write off, most improvements, such as building a deck or remodeling a kitchen, will only offer tax benefits when you calculate capital gains taxes on selling your house. If you own rental property, you can claim repairs as a deduction and write off improvements by depreciation.
Improvements
According to Internal Revenue Service standards, an improvement is a project with a lifespan of more than one year that either prolongs the life of your house -- for instance, storm shutters or a new roof -- or increases the property value. Repairs simply protect the house from further damage or keep it in running order. If you make one improvement, then replace it -- remodeling your bathroom twice, for instance -- you can't claim any capital-gains tax benefits for the first improvement.
Capital Gains
To figure capital gains on the sale of your home, you subtract the "adjusted basis" from the sale price. The basis is usually the amount you paid it for, adjusted for various expenses, such as improvements. If you paid $100,000 for your house, then put $5,000 into improved wiring and $10,000 into a new master bedroom, the adjusted basis would be $115,000. If you sell the house for $150,000, your capital gains will be $35,000 rather than $50,000.
Special Cases
Some improvements can give you a tax benefit. The federal Energy Star program, for example, offers tax credits for geothermal pumps, solar-heating systems and residential wind turbines installed before the end of 2016. The cost of remodeling a home for medical reasons, such as installing ramps or widening doorways, is deductible as a medical expense; if they add to the value of the home, however, you have to treat them as part of the adjusted basis rather than as a medical deduction.
Considerations
If you own income-generating rental property, you may be able to depreciate your home improvements, deducting a percentage of them on taxes over several years. Repairs can be treated as a straight tax deduction from your rental income. If you or your family use the house for part of the year, you have to adjust the amount you claim depending on how much of the use is rental compared to how much is personal.
Tags: capital gains, adjusted basis, your house, capital gains taxes, gains taxes, home improvements
