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Most homeowners know that their home entitles them to some federal tax breaks, chief among them, deductions based on mortgage interest and property taxes that they pay annually. However, first-time home buyers and sellers, and even seasoned homeowners, may not know about other tax breaks for home improvements.
Always consult a qualified tax adviser when trying to determine your potential tax liability; however, here’s a rundown of ways you may be able to save on your taxes by making home improvements both large and small.
As soon as you purchase your home, you should start a file and save receipts, contracts, or other relevant documentation that show costs for all of your major remodeling and home upgrade projects you make over the years. When you sell your home, you may be able to add the costs of major upgrades to your original purchase price to increase your adjusted cost basis. The more upgrades, the more you may be able to reduce your capital gains or even show a loss on the sale of your home for tax purposes.
The IRS considers the following examples as capital improvements that may be used to increase your cost basis:
You can check IRS publication 523, Selling Your Home; 530, Tax Information for Homeowners; and 551, Basis of Assets, downloadable for free at irs.gov, for more detailed information.
Homeowners can benefit from upgrading to certain alternative energy systems that pay off in tax credits for installing and using the following types of equipment:
File IRS Form 5695 to recoup 30 percent of the purchase and installation costs with no maximum, with the exception of fuel cells and microturbines that have a $500 cap. Keep in mind that tax credits reduce your home’s adjusted basis by the amount of the credit you receive.
If you, your spouse, or a dependent requires physical accommodations that necessitate remodeling because of a medical disability, the cost may qualify as a medical expense. If the home improvement increases the value of your home, the expense is reduced accordingly. For medical modifications that do not increase your home’s value, you can include the entire cost as a medical expense. Architectural and aesthetic improvements to your home do not qualify. IRS Publication 502 contains a worksheet to determine capital expenses considered true medical expenses such as the following:
If you take out a loan to make capital improvements to your home (improvements that increase its value, improve its longevity or modify it for new uses), you may be able to deduct the interest on your taxes. Loans for repairs may not qualify for some home improvement loans. However, home equity lines of credit (HELOCs) can be used for a variety of purposes, and some 203k mortgages allow you to make many types of remodels and repairs to make a home livable. Interest for these types of mortgage loans on your main or second home is typically tax deductible.
In addition to saving tax dollars when you file your return with the IRS each year; energy-wise home upgrades may also entitle you to some additional tax incentives from your state and local governments. The Database of State Incentives for Renewables & Efficiency® (DSIRE) allows you to filter and search for a wide array of tax credits, rebates and other incentives available locally.
This post was last modified on January 29, 2021 3:16 pm
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