As a homeowner, there may be several questions plaguing your mind about the welfare of the home and that of your pocket. As you keep your home in a semblance of order with certain home improvements, a question must have crossed your mind: “can I claim home renovations as tax deductions?” While you are thinking about how to get a tax break for all the money spent on home improvements, there are many possible answers. However, a certain fact is that you must not misplace the expenses from all home improvement and beautification procedures.
Common examples of home improvement are:
- Installation of air conditioning
- Replacement of roof
- Addition of sunroom
You cannot deduct the cost in the same year you spent the money – it is utterly impossible. In the event that you sell your house, a well-kept list of expenses may result in a reduction of taxes at that very moment.
Repairs versus improvements
There are two categories of money you spend on your home according to tax – the cost of repairs versus the cost of improvements. Cost of capital improvements is added to the tax basis in the house.
What is a tax basis? To determine the amount of your profit, you subtract some amount from the sales price. This amount is known as the tax basis. However, a capital improvement is a feature that prolongs the life of the home by adding value and increasing the adaptability to new uses.
Also, there are no strict rules concerning the list of qualified features. But you can add to the cost of certain additions to the home such as:
- A swimming pool
- A new central air-conditioning system
- A new roof
- An extra water heater
- Storm windows
- Home security system
Nonetheless, some energy-saving home improvements yield tax credits at the same time of making them.
Although the list is not restricted to big-ticket items, big items seem to attract the most amounts.
On the other hand, the cost of repairs is not included in the basis. Rather than improvements, painting a room, fixing a gutter and replacement of window pane is a list of repairs.
Compared to the past, tracking is less critical
In the past years, homeowners made a habit of keeping receipts for processes that were similar to a home improvement. When the house was sold, every additional dime to the basis was a dime less than the taxes of the IRS. Recently, there is no guarantee that tracking the basis will be profitable as home-sale profits are free of tax for homeowners.
When you sell, save!
The current law shows that the profit on the sale of the principal residence is tax-free for the first $250,000 profit. For married couples, the amount is $500,000 if they file joint returns. But the condition I that the homeowner must be a resident of the home for up to two years out of the five years before the sale.
Passing this rule into law was the onset of a ruckus. Several advisors had interpretations that the homeowners would be unable to track their basis. The assumption was based on the fact that it was unearthly impossible to sweep about half a million in profits on a single home. More so, a homeowner that has resided in a home for several years knows that the large exclusion is insufficient when compared to the profit that is accruable to such longstanding home. Therefore, keeping good records is a necessity.
When you want to determine the size of the profit when you sell a house, there are certain things to consider:
- Everything you paid for the house
- Original price of purchase
Add all three items to the cost of improvements that you have made in the past few years and you will arrive at an amount known as the ‘adjusted basis’. Prior to the 5th of August, 1997, all sold homes whose homeowners took advantage of the old rule where home sellers can put off tax on their profit by simply rolling over the profit into the new home makes the adjusted basis a bit lesser due to reductions from the roller-over profit itself.
Now, compare the sales price of the house with the adjusted basis. Generally, profit that is greater than $250,000 for individuals or $500, 000 for married couples may be prone to taxation. On the other hand, there are no deductions in losses on sales of personal residences.
For these reasons, it is absolutely important and beneficial to keep a list of money expended in an expansion, fixing up, or repair of the house. Apart from proper documentation, it also avoids or reduces taxes after sales.
- For any improvement, you make in the home, pile up the receipts in a neat stack. You may get a special folder to document these receipts and records.
- A portion of your profile on sale may be taxable if you have lived in your house for several years. Also, it is applicable to you when you have accumulated area housing prices after donkey years of living in a home. But there is a solution. To reduce the tax gain, you can include the improvements in the house’s cost basis.
- You may be able to write off part of the adjusted basis of your home through depreciation if you operate a business from the confines of your home or put up part of the home for rent. When you do so, the process of selling the house will not include an exclusion of the amount of depreciation. If you took a gain exclusion break of about $250,000 and $500, 000, you definitely cannot exclude the depreciation amount. Besides, the repair cost to that portion of the home may at that moment, be deductible.
For the purpose of the tax, home improvements are facelifts for the home. If your home is for residential purposes, home improvements may not be deductible.