You may have heard that you can claim federal tax deductions on home improvements. Some deductions are available at the time of your home purchase, others during the years you own your home, and a few when you sell. However, there are rules that govern each category.Today, we’ll walk you through which of your Atlanta, GA, home improvements count toward taxes, as well as a few things you should know before you file your taxes this year.
What Counts When You Buy?
Using Your Mortgage to Finance Improvements at Purchase Time
If you’re just now purchasing a home that you know you’ll want to make improvements to in the future, you may be able to save some money by taking out a mortgage that includes extra funds for home renovations. While it doesn’t sound beneficial to increase your mortgage, doing so enables you to deduct the interest on the extra amount from your tax bill.
Remember that this only counts toward lowering your tax liability when you itemize deductions. If your total in mortgage interest payments (and other itemized deductions) doesn’t exceed the standard deduction of $12,200 ($24,400 for married filing jointly), you may not get extra savings that way.
What Counts During the Years You Own Your Home?
Energy Conservation Improvements and Medically-Necessary Renovations
There are a couple tax incentives in place for home improvements that conserve energy. For example, you can receive a federal tax credit of 26% of the cost of installing a geothermal heat pump or solar energy system. This break includes the equipment and installation. These credits were renewed for 2019, and then they are reduced each year through the end of 2021. (Note that tax credits for energy conservation must be applied in the same year that any given unit is installed and placed in service. A Manufacturer Certification Statement must be kept on record for write-offs to qualify.) Through 2020, you can also take advantage of a 10% tax credit up to $500 for energy upgrades like an efficient air conditioner or furnace.
If you or a member of your household needs an accessible home, you may be able to deduct certain home improvements you make to achieve it. The deduction is usually based on immediate medical need and may not apply to renovations you make related to plans for aging-in-place. The IRS allows you to deduct medical expenses depending on your income and how much you spend. This means that if you install exit ramps, widen doorways or adjust countertop height, you may be able to deduct a portion or all of the cost. Keep in mind that the deduction only works for improvements that do not increase your home value. If you build an addition to expand the livable space on the main floor for a disabled member of the family, you can usually only deduct what you spend minus the increase in resale value.
What About Vacation Homes/Rentals?
While you can’t deduct the cost of most improvements you make to your primary residence, the same may not be true for other types of real estate property you own. For example, if you make improvements to a vacation home that you usually rent out, it could qualify as a business deduction. You’ll have to start counting rent payments as income on your taxes to get this deduction, but it might be well worth it.
How to Avoid Paying Capital Gains on Home Appreciation at Selling Time
When you sell your house, you subtract your tax basis from the sales price to determine the amount of your profit. Home improvements that add value to your home, prolong its life, or adapt it to new uses (such as an addition, a new roof, an extra water heater, etc.) are considered capital improvements and are added to your tax basis. In other words, tracking home improvements may enable you to report a smaller profit when you sell your house.
Most homeowners who have lived in their primary residence for several years are eligible to exempt up to $250,000 ($500,000 for married filing jointly) in profits from their federal taxes the year they sell the home. The amount of capital gains depends on the tax basis for the property.
Home renovations increase your home basis, so they can reduce what’s counted as home sale profit, limiting the taxable portion of your sale price. As always, you’ll want to check all of this information with your own accountant, since every homeowner’s tax situation is unique.