It’s tax time.
Many of us have likely prepared and filed our 2016 taxes, but there are a few more days left for those procrastinators.
Homeownership brings many joins. First and foremost, our homes provide a stability and security to live comfortable and support our families.
Another terrific benefit is the tax code.
There are a handful of tax breaks, in particular, home improvement tax deductions that homeowners can take every year (based on the current tax code, which is always subject to change).
During tax discussions, it is important to note that every individual may have unique circumstances, but in general, these homeownership tax deduction are applicable to most people.
As the kind tax team at TurboTax outline with a detailed review of homeownership tax benefits, there are a couple of caveats.
The actual amount of money you save on your annual income tax bill depends on a variety of factors:
- Filing Status (i.e., single, head of household, married filing jointly, married filing separately)
- Standard Deduction Amount
- Other Itemized Deductions
- Taxable Income
Keep in mind that any home-related itemized deductions, plus other itemized deductions must add up to more than the standard deduction or they won’t save you any money.
Also, there are certain things that cannot be deducted for a personal residence, such as:
- Homeowners Association Dues
- Home Insurance
- Appraisal Fees
- Cost of Improvements (except in the relatively rare case where they qualify as a medical expense)
Keep in mind that you should save and/or record the any home improvement costs because that expense may reduce your capital gains tax when selling the home. Costs accrue over the entire cost of the house, which helps reduce gains and therefore, lower your tax bill.
So, if the cost of home improvement projects do not provide any benefits, what are the home improvement tax deductions?
1. Home Improvement Loans
Many home improvement projects are quite costly and homeowners take out a loan to complete the work.
A real estate tax attorney details the applicable loan type.
“A qualifying loan is one that is taken out to add “capital improvements” to your home, meaning the improvement must increase your home’s value, adapt it to new uses, or extend its life.”
Examples of capital improvements include:
- adding a third bedroom
- adding a garage
- installing insulation
In addition, there are some home improvement projects that add more value to homes. Some vary in cost as replacing the main door and remodeling the kitchen or basement can create a large range to complete.
Tax experts also point out that qualifying loans do not apply to basic repairs and fixes. It is important to distinguish these two types of work, however, because only the interest on loans taken out for home improvements may be deducted from your income taxes.
Loans that do not qualify for a home improvement loan interest deduction are those that are taken out for repairs only, such as:
- Fixing Broken Windows
- Replacing Cracked Tiles
However, if there are repairs that can wait and you are thinking about selling your home, then try to wait. Some repair costs remain deductible under the selling costs provisions.
2. Energy Efficiency Upgrades
There are a few home improvement tax deductions applicable to energy efficiency. The largest is the Renewable Energy Efficiency Property Credit, which allows homeowners to deduct up to 30% of the cost of equipment and installation.
Jayson Mullin, founder of Top Tax Defenders, explains the benefits:
“You could save up to 30% of the total cost of installing certain renewable energy sources in your home. The 30% credit applies to the cost, including labor and installation, and must be taken in the year the item was placed in service.”
Credits directly lowers your tax bill and currently extended through 2016. Homeowners should keep all receipts and contracts from the installation (and file for this credit using Form 5695).
There are also a handful of tax credits under the Non-Business Energy Property Credit, which have been renewed and extended through 2016. These tax credits are available for purchases on energy efficient products, such as windows, water heaters and insulation made in 2016, as well as retroactive to purchases made in 2015.
Separately, there are other programs that help reduce the cost of making energy efficient home improvements. While they may not impact your home improvement tax deductions, they will contribute to saving money over time.
For example, home energy checkups identify inefficient areas in the home and provides recommendations to address the issues. At SolvIt, our checkups focus on the following:
- Provide a Whole-House Energy Assessment
- Improve Energy Efficiency
- Reduce Energy Usage
- Lower Monthly Utility Costs
We are certified contractors with Eversource and UI. We provide homeowners with the necessary documentation for processing all available rebates.
3. Business-Related Deductions
Many people work from home and many people have a home office. The home office tax deduction is a great way to depreciate the home improvement cost for people with a home business.
To qualify for the home office deduction, homeowners need a legitimate business. Plus, homeowners must usesan exclusive portion of the house for regular business use.
For people that qualify, 100% of the cost home office improvements remain deductible as a business expense. For example, homeowners that use a bedroom as a home office and pay a carpenter for work rely on depreciation for the entire cost of the project.
However, for any improvements that benefit the entire home, then the corresponding deduction requires a pro rata allocation. For example, homeowners using 20% of your home as an office typically depreciate 20% of the upgrade cost for their HVAC system.
Another related provision applicable for those that rent a portion of their home. Homeowners depreciate home improvement expenses as a rental expense, which reduces reportable rental income.
Just like the home office deduction, improvements benefiting the entire house require depreciation based on the percentage of rental space.
The tax code helps promote homeownership.
The biggest tax break is the mortgage payment interest deduction, which covers interest paid on the first $1 million of home loans. It is very valuable for first-time homeowners, but there are a few other benefits as well. In particular, home improvement tax deductions can help recoup large expenses and add to the long-term value of your home.
For any home improvement projects that require plumbing, electric, HVAC needs, then SolvIt is happy to help. We can leverage our relationships with utility companies to help process and available rebates and offer financing to help make the necessary improvements today! If there are any questions, please let us know.