Are Home Renovations Tax Deductible?

If you remodeled your home last year, can you write it off on your taxes?

In most cases, the answer is no. However, there are a few circumstances in which some projects could reduce your tax bill.

These include changes that may reduce capital gains taxes if you sell your home. Others include some energy efficiency improvements, as well as medically necessary renovations.

Save if You Sell Your Home

If you sell your house, your first $250,000 in profit is exempt from capital gains taxes if you are a single filer. If you are married filing jointly, your first $500,000 is exempt. If you make anything over those amounts, you would owe capital gains taxes.

To calculate your profit, subtract your cost basis in the home from its final sales price. Your cost basis is the total of all qualified expenses you put into the home. This includes the purchase price, closing costs and capital improvements.

For example, let’s say you’re a single filer and you purchase a home for $200,000, including closing costs. You then invest $25,000 in a kitchen renovation. Your cost basis in the home is now $225,000. If you later sell for $475,000, your profit would be $250,000. Without the kitchen renovation, your profit would be $275,000. You would then owe capital gains taxes on $15,000 of your profit that exceeds $250,000.

A qualifying capital improvement must last for more than one year. It must also add value to the home, prolong its life or adapt it for new uses. Examples include a new bathroom, finishing the basement or adding a new master suite.

Finally, repairs that only maintain the condition of the home but don’t add value do not increase your cost basis. Examples include fixing a leaky pipe or a broken window.

Energy Efficiency Tax Credit

The Renewable Energy Tax Credit is set to expire in a few years. However, it still applies to some projects intended to boost the energy efficiency of your property. Eligible improvements include solar, wind, geothermal and fuel cell technology. 

Depending on when you began the project, you can reduce the amount of taxes you owe by a percent of the cost: 

  • 30% for properties placed in service after December 31, 2016 and before January 1, 2020
  • 26% for properties placed in service after December 31, 2019 and before January 1, 2021 
  • 22% for properties placed in service after December 31, 2020 and before January 1, 2022

A qualifying property must be located inside the United States, and it may be an existing home or a new construction. It doesn’t have to be your primary residence unless the new equipment is a fuel cell. In other words, for most energy efficiency projects, you can claim the tax credit for a vacation property. 

Be aware that this credit is not refundable. In other words, if the credit exceeds the amount you owe, you won’t get a refund, but it may be credited to your next tax return. You may not claim the credit for a rental property. 

In addition, you must reduce your cost basis by the amount you claim for the energy tax credit. For example, if you purchase a home for $200,000 and spend $4,000 on energy efficiency improvements, your cost basis goes down to $196,000. This may increase your chances of owing capital gains taxes if you sell.

Medically Necessary Home Improvements

If you or a family member requires structural modifications for a disability or other condition, you may qualify for a tax deduction. Examples of qualifying medical renovations include: 

  • Entrance or exit ramps
  • Bathroom modifications
  • Lower cabinets
  • Widening doors or hallways
  • Adding handrails or grab bars

You cannot deduct a medical renovation that increases the value of your home. If your home value does go up as a result of the project, you must subtract the amount of the increase from your deduction. 

If you’re looking to update your home, contact Elite Renovations & Design today for a free quote!

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