Home improvements
have tax benefits.
Home improvements can save you money on your taxes through a variety of tax deductions and credit. Tax deductions reduce the amount of income you pay taxes on. They can be either itemized deductions, meaning you cannot take the standard deduction, or above-the-line deductions, meaning you can take them in addition to the standard deduction. It does not matter if you take only one itemized deduction or a dozen of them--you must give up the standard deduction. Tax credits are even better because they decrease the amount of tax you owe.
Repairs Versus Improvement
The Internal Revenue Service (IRS) differentiates between home repairs and home improvements for the purposes of tax deductions. Home repairs include maintenance performed that is associated with the upkeep of the house rather than increasing the home value such as replacing old electrical wiring or pipes. Home improvements add value to the home such as a swimming pool or new kitchen. If while adding a home improvement you also perform home repairs, such as replacing pipes in the kitchen when you remodel it, you may be allowed to deduct those costs depending upon the type of property it is.
Interest Payments
If you take out a mortgage or home equity loan and all of the proceeds are used to improve your home, you are allowed to deduct the interest payments as an itemized deduction. If you file a single return you can deduct the interest on the first $500,000 of a mortgage and if you file a joint return you can deduct the interest on the first $1 million of the loan. If you take out a home equity loan that is not used for home improvements, you can still deduct the interest on the first $50,000 if you file a single return or $100,000 if you file a joint return.
Energy Credits
If you install energy-efficient items as a home improvement you can claim a tax credit for 10 percent of the cost of those items up to $300 per year. Items that are eligible for this tax credit include certain doors, windows, insulation, air conditioning, heating and biomass stoves. If you install solar panels or water heaters, geothermal pumps, windmills or fuel cells, there is no cap on the amount of the credit.
Medical Deduction
If you make home improvements out of medical necessity you may be able to claim an itemized deduction for medical expenses. Examples of medical necessity include making a home wheelchair accessible or making a home more resistant to allergens like pollen or mold. In order to claim this deduction make sure you have a doctor's note verifying the necessity. When taking the deduction, you can only deduct expenses that are over 7.5 percent of your adjusted gross income. For example, if you have an adjusted gross income of $30,000 and you spend $5,000 to make your home wheelchair accessible, you can deduct $2,750.
Increasing Your Basis
When you sell you home, the amount of taxes you are responsible for paying depending on how much greater the selling price of the home was than the price that you paid for it, also known as your basis. If you implement home improvements you can add the cost of the improvements to your basis so you will owe less taxes when you sell the house. For example, if you paid $200,000 for the house and put $5,000 into the house to remodeling the kitchen, your basis is now $205,000.
Tags: deduct interest, deduct interest first, Home improvements, interest first, itemized deduction