Even professional contractors can get confused by all the rules and regulations that must be met in order to make home improvement expenses tax deductible. That’s why it’s so important to learn them in advance, not at the last minute. This article will let you know what kind of tax deductions you can expect regarding your home improvement expenses.
Personal home improvement
According to IRS, all expenses related to maintenance and repair work on personal property fall under personal, instead of business expenditures. This means that you won’t be able to get a tax deduction, except in special circumstances. The extra conditions apply when a part of your house is used to conduct some sort of business activity, which can be grounds for the home office deduction.
Tax breaks will usually apply to your personal home only when you’ve decided to sell it. On the condition that you’ve occupied your residence for at least 3 out of the last 5 years while it’s been in your possession, you’ll receive a tax deduction of $250,000 on capital gains. Married couples with joint income tax will be able to exclude up to $500,000.
Adjusted tax basis and taxable gains
The difference between sale price of your property and your tax basis is the sum of all investments made by you on home improvement and related expenses. To calculate the taxable gain, you need to subtract your adjusted tax basis (original tax basis minus tax deductions that you were entitled to) from the total sale price for your home. A negative number will mean a capital loss.
The system is a bit more complex when dealing with investment properties, because renovation and home improvement costs warrant different tax deductions in that situation. You would also have to pay attention to amortization and depreciation values, which include factors like decay or wear into your tax calculations.
Keeping your home in proper shape by preventing deterioration, retaining functionality and paying for maintenance is classified by IRS as repairs. These expenses can therefore fall into the category of daily business expenses. Some of the most common examples of repairs include:
- Carpet and drape cleaning
- Maintenance of vents and air ducts
- Fixing broken glass
- Other activities that restore original function of your property
On the other hand of the spectrum are renovations, which usually aim at improving your home’s function beyond its original purpose. As a result, both the value of the property and its life expectancy should increase. These changes positively affect the resale price of your house.
Seeing as the money spent on renovation should theoretically bring in dividends in the long run, the IRS considers them to be capital investments. It is therefore required for all of the pertinent tax deductions to be spread out over the expected life of the property in question, in a process referred to as depreciation and amortization.
Energy home improvements
You can claim energy tax credits which apply to existing homes, new construction, second homes, but they do not apply to rental homes. Listed below are home energy items which qualify:
- Geothermal heat pumps
- Solar water heaters
- Solar panels
- Fuel cells (30% of costs up to $500 per .5 kW of power capacity)
- Small wind energy systems (residential wind turbine)
Online tax software is your best chance to claim your home improvement and energy tax credits. By answering simple questions the program will fill in your entries into the correct place. Your tax return will be scanned many times before you file to ensure you will not miss any valuable tax credits or deductions. Try TurboTax today to claim every tax deduction you deserve.