Taking on a lot of home improvements can add up quickly. Many people hope to get some kind of tax benefit for all that spending to make their property better. There are only a couple of scenarios, however, when you can write off home improvement expenses.
Home improvements may be smaller projects like upgrading your patio or major overhauls like a complete interior renovation. The specific kind of enhancement you’re taking on will impact whether you’re eligible for a tax credit. A home improvement, as defined by tax law, is work that substantially adds to the value of your home, adapts the home for new uses, or increases its useful life.
The first thing to understand is that most general home improvements are not tax deductible. There are still a couple of ways to write off related expenses, which will be covered in this guide. Here is everything you need to know about writing off renovation costs.
When Can You Write Off Home Improvements?
All hope is not lost if you’re spending a lot on improvements. Sometimes understanding how to qualify for tax credits will help you plan the work, including what equipment to install. Here are a few ways you may be able to write off making changes to your home:
Making Your Home Energy Efficient
Lawmakers have created tax credits to encourage homeowners to improve the energy efficiency of their property. Installing equipment like solar panels or small wind turbines, for example, could mean you can take the renewable energy tax credit. Systems put in service by December 31, 2019, can earn a credit of 30%; for those installed between 1/1/2020 and 12/31/2022, the credit is 25%; and for those installed between 1/1/2023 and 12/31/2023, the credit is 22%.
Both new construction and existing homes qualify, but not rentals. Either primary or secondary homes qualify.
Medical Home Improvements
Certain medical expenses are tax deductible, including payments for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body,” according to the IRS. Eligible expenses must exceed 7.5% of your adjusted gross income to be deductible. You may be able to write off substantial improvements made to a home that fits within this category.
Equipment that aids someone with a disability, like a wheelchair ramp, could qualify as a medical expense. Additions that increase a property’s value, however, are only partially deductible.
You Qualify for the Home Office Deduction
Some self-employed individuals or business owners use a portion of their home as an office and may qualify for the home office deduction. They must use this office exclusively and regularly for business to be eligible, among other requirements. Homeowners can depreciate improvements made to the home office in this case.
Repairs that keep the home in operating condition are deductible, while capital improvements are added to the basis of the property. Improvements to the rest of the house that only partially impact the office will be deductible according to the percentage the home office takes up within the home.
One important note about home improvements is that, even if you don’t qualify for a deduction, you may still be able to get a tax benefit. Improvements may lower your tax burden when you sell your home for a profit because improvement value is added to the tax basis of the home, and the greater your basis, the less profit you’ll get. This means you will owe less in taxes.
4 Tips for Optimizing Tax Benefits of Home Improvements
The bottom line is that home improvements could have an impact on your tax liability in one way or another. It just takes understanding your options and getting to know current tax law changes.
How do you make the most of those potential benefits? Here are a few tips:
1. Keep Detailed Records
Keep all receipts and records for any expenses you make on home enhancements. This is crucial when reporting the amounts later, whether adding to the home’s basis or compiling your tax return.
2. Distinguish Between Repairs and Improvements
Make sure your improvement is an improvement and not a repair. Improvements must add to the home’s value, prolong the property’s useful life, or adapt it to do something new. A repair, on the other hand, is made to keep the home functioning properly and doesn’t change the value.
3. Writing Off Office Improvement Depreciation Can’t Be Excluded Later
Writing off depreciation for improvements you made to your home office means that you won’t be able to exclude the depreciation amount you took when you sell the home to lower your tax burden, as mentioned above.
4. Always Ask a Professional
Tax law can be complicated, especially around home improvements and related deductions. Never risk taking the wrong step. Talk through your options with a tax attorney who understands the law and can advise accordingly.
Making an improvement to your home can increase its value, not to mention make your life a little easier or more enjoyable. Just remember that in order to write off any of those expenses, you must meet certain requirements. You can otherwise hope to take advantage of a lower tax bill when you sell your home if the renovation value is added to the home’s basis.
Silver Tax Group Is Ready to Help
Take the right approach to home improvement deductions by discussing your options with a professional. Meet with the team at Silver Tax Group with any questions you may have about whether you can write off home improvements. We will get to know your situation and explain applicable tax guidelines and credits.
Our team is skilled in tax law and can help you solve any tax-related issue. Reach out to our office to speak to a tax expert about the benefits of home renovations.
