What You Need to Know About Home Upgrades and Your Taxes
by Susannah McQuitty
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A guest post from Erin Vaughan
You don’t need to read an article to know that preparing and paying income taxes is not fun. Fortunately though, when it comes to your living space, the federal government is skewed vastly in favor of homeowners—and if you’re smart when you file, you can take advantage of some generous home-related deductions. From energy improvements to upgrades you use to sell your home, there are a wide range of ways to get your home projects—or at least your loan interest!—covered on your next filing. Check it out below.
Some energy improvements can earn you money
Got your eye on a solar energy system? With more than a million residential installations up, solar isn’t just for your crunchy granola set anymore. In fact, it may very well be a smart investment strategy—particularly when it comes to your taxes. Not only will you save on your monthly energy bills, the federal government also offers an incentive for solar households through your federal income taxes. Up to 30 percent of your system’s costs and installation fees can be deducted against your tax liability. System costs more than what you owe? You can roll the credit over to use next year, too. For most homes, that represents somewhere between $6,000 to $10,000 back on their taxes. That means solar can save you some major green—all while making your home greener too.
Just sold your home? You could lower your taxes by deducting improvement projects
Your regular old run-of-the-mill home addition usually can’t be deducted on your income taxes. Not so if you use that addition to sell your home, though. Money you spend to improve your home before you put it on the market can be calculated into your home’s adjusted cost basis—basically, the IRS’s way of saying what your home is worth. That can affect the profit of your home’s sale, since the government lets you take the first $250,000 (or $500,000 if you’re filing jointly) tax-free. The more you improve, the more you can claim!
Some repairs may be included in casualty/loss rules
So you made it through the big storm safe and intact. If only you could say the same thing for your home! Suffering damage from a natural disaster is always traumatizing, but the silver lining is that the cost of repairs is often deductible on your income taxes. Floods, tornadoes, hurricanes, fires, and other events qualify—although the rules are a bit complicated. Be sure to reference our Tax Guide for more information on cost of repairs after casualty loss. The cost of your new roof installation could be totally covered!
You may be able to deduct interest on home improvement loans
Let’s be honest: the money you spend up front on a home improvement project probably doesn’t count toward a deduction. However, if you used a loan to afford a repair or upgrade, the interest from that loan may qualify. Any loan secured by your home qualifies, so if you used a home equity loan to pay for an improvement, for instance, you can deduct all the interest you paid this year—just like you’d claim the interest on your mortgage payments. Keep in mind that interest paid on an unsecured personal bank loan—or your credit cards—can’t be applied toward this deduction.
Property taxes are almost always deductible
Worried that your new kitchen remodel or garage addition will hike up your property taxes? Don’t sweat it—in the majority of cases, paid property taxes can be deducted when you prepare your federal income taxes. As long as you aren’t delinquent, almost any real estate tax paid to a taxing authority qualifies for this deduction. However, if you pay taxes out of a mortgage escrow fund, you may not be eligible. No escrow? Bring on the tile samples! It’s time to get started on that new master bath!
Erin Vaughan is a blogger, gardener and aspiring homeowner. She currently resides in Austin, TX where she writes full time for Modernize, with the goal of empowering homeowners with the expert guidance and educational tools they need to take on big home projects with confidence.
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