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Learn how to maximize your tax savings by claiming home renovation and improvement expenses with this comprehensive guide.
Home renovations can be a substantial financial investment, but they can also offer tax advantages.
Depending on the nature of the improvements, homeowners may be able to claim these costs on their taxes, potentially reducing their tax liability.
Understanding which home improvements are tax-deductible and how to properly claim them is crucial for maximizing your benefits.
Here’s a comprehensive guide on how to claim home renovations and improvements on your taxes.
1. Distinguish Between Improvements and Repairs
First, it’s important to differentiate between home improvements and repairs, as they are treated differently for tax purposes.
Home improvements add value to your home, prolong its useful life, or adapt it to new uses—these often qualify for tax benefits.
Examples include adding a new roof, installing new windows, or adding a room.
In contrast, repairs merely maintain the current value of the home and are generally not deductible.
2. Know Which Improvements are Tax-Deductible
Certain home improvements may qualify for tax deductions. The most common are those that increase the energy efficiency of your home, such as solar panels, solar water heaters, geothermal heat pumps, and wind turbines.
These improvements can qualify for the Residential Energy Efficient Property Credit, which offers a credit worth 26% to 30% of the cost of installation (check current IRS guidelines as rates and rules can change).
3. Consider Home Improvements for Medical Care
Improvements made for medical reasons can also be deductible if they do not add value to the property but are made for medical purposes.
This might include widening doors to accommodate a wheelchair, installing ramps, or adding lifts.
To claim these, the cost of the improvements must exceed 7.5% of your adjusted gross income, and you’ll need to itemize your deductions.
4. Home Office Deductions
If you use part of your home regularly and exclusively for business purposes, you can deduct expenses related to the business use of your home, which can include a portion of your home improvement costs.
You’ll need to calculate the percentage of your home that is used for business to apply this percentage to the improvement costs.
5. Rental Property Improvements
If you own rental property, you can deduct the costs of improvements made to this property from your taxable rental income.
These improvements must directly benefit the rental property and be made to enhance its value, extend its life, or adapt it to new uses.
6. Keep Detailed Records
For any tax-deductible improvement, it is crucial to keep detailed records. This includes keeping receipts, contracts, invoices, and bank statements.
Before and after photos can also help substantiate the claim. You’ll need these documents to prove the expense in case of an IRS audit.
7. Understand Depreciation
Some improvements, particularly on rental properties, must be depreciated over time rather than deducted as a single expense.
This means you deduct a portion of the cost over several years. Consult the IRS guidelines or a tax professional to understand how to correctly depreciate home improvements.
8. Capital Gains Tax Exemption for Sellers
While not a deduction on annual taxes, it’s important to note that significant home improvements can be added to the base cost of your home when calculating capital gains tax upon sale.
This can reduce the amount of capital gains tax you may owe if your home sale exceeds the IRS exclusion limit.
Conclusion
Claiming home renovations and improvements on your taxes can be beneficial but requires understanding and following IRS guidelines.
Whether you’re making improvements for energy efficiency, medical reasons, or business use, proper documentation and adherence to tax rules are essential.
Consult with a tax professional to ensure you are making the most out of your eligible tax deductions and accurately reporting them.
