Home improvements can add value to your home even when the market is down. According to Interest.com, the three most valuable home improvements are adding upscale siding, adding a wooden deck and minor kitchen remodeling. There is no direct deduction for money that you spend on improving your house. However, there are a number of indirect savings that you can benefit from on your taxes for expenses you incur for home improvements.
Improvements versus Repairs
The IRS distinguishes between home improvements and home repairs. Home improvements are projects that add additional value to your home while home repairs are maintenance activities related to the upkeep of your property. For example, adding a garage to your home would be a home improvement while repainting your garage would be a home repair. Generally, expenses related to home repairs are not tax deductible.
Loan Interest
If you take out a mortgage to finance your home improvements, you can deduct the interest you pay on the loan. For single tax filers, the deduction is capped at the interest on the first $500,000 of the loan. For married couples who file a joint return, the limit is the interest on the first $1,000,000 of the loan. If you take out a home equity loan and use it exclusively for improving your home, the interest deduction is subject to the same limitations as a mortgage. However, if you take out a home equity loan that is not used exclusively for your home, you can still deduct the interest on the first $50,000 ($100,000 if married filing jointly) of the loan.
File
The interest is deductible in the year that you pay it. In order to claim the interest deduction for home improvement loans, you have to itemize your deductions. This means you cannot claim the standard deduction and you have to file using Form 1040.
Increased Basis
Another tax advantage to putting money into home improvements is increasing your basis in the home. Your basis is the amount of money you paid for the home. When you sell your home, as long as you have lived in it for at least two of the past five years, you do not have to pay capital gains taxes on the first $250,000 of profit. Any money that you spend on home improvements can be added to your basis to reduce the profit that you have to pay taxes on when you sell the house.
Ways to Include Home Repairs in Deductions
Normally, home repairs are not included as home improvement deductions on your taxes because they are maintenance costs rather than improvement costs. However, if you are able to combine repairs with home improvements you are allowed to count them as part of cost of home improvements. For example, if you decide you want to remodel your bathroom you can replace the old pipes as well and include that as part of your deduction. If you had only replaced that pipes that would have been considered a home repair.
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