Now that the New Year has arrived, we're all looking for ways to make improvements in our lives, from getting fit to reexamining our finances to remodeling that horrid 1970s-style bathroom. If you're planning to make any improvements to your home this year, here are some things you need to know about home upgrades and their tax implications.
Tax Breaks for Home Improvements
So, if your project qualifies as a home improvement, does that automatically mean it's tax deductible? Not necessarily. In fact, home improvements are generally not tax deductible. However, there are some exceptions and other kinds of tax breaks that may apply to you, including:
When You Sell: If your home increases in value (whether through appreciation or upgrades) and you turn a profit when you sell, that profit — known as capital gains — will be taxed. However, you can reduce the amount of capital gains taxes you owe by increasing your adjusted cost basis. Your cost basis is what you paid for the home, minus costs incurred (including home improvements). A higher adjusted cost basis means a lower capital gains tax, so be sure to keep receipts and paperwork from home improvements you make to increase your adjusted cost basis when you're ready to sell.
Solar Energy Upgrades: While the tax credits for most energy efficiency upgrades expired in 2016, you can still claim a tax credit for solar water heaters and solar panels through 2021. Currently, the tax credit is 30% of the cost, including installation. The credit decreases to 26% for tax year 2020 and drops again to 22% for tax year 2021. So, if you plan to make solar upgrades, do so sooner rather than later to claim the higher tax credit. Visit energystar.gov for requirements and more information.
Medically Necessary Modifications: Renovations that are made to accommodate a medical disability can typically be deducted on your taxes. Examples include adding a wheelchair ramp, widening doorways, adding handrails or support bars, and installing lifts. There are some limitations, and you must itemize deductions instead of claiming the standard deduction, so be sure to talk to your tax advisor first. You can also check out IRS Publication 502 for further details.
Interest on Home Improvement Loans: If you take out a loan that's secured by your home — such as a cash-out refinance or home equity line of credit (HELOC) — to pay for improvements, you can deduct the mortgage interest from that loan on your taxes. This can help you save money by reducing your taxable income.
Whether you'd like to increase your home's resale value or simply want to improve your living space, home renovations can be a valuable investment. Just be sure to keep the above information in mind before starting any project in order to maximize your tax savings.