Hey everyone, it’s Finance Fridays again. Today is just going to be a short post on something I learned of recently. We’re going to talk about “Home Improvement Tax Benefits”.
Home Improvement Tax Benefits
As I’ve stated before, recently my own home is undergoing some renovations. Like all things in Hawaii, it doesn’t come cheap — and it’s also important to understand that you get what you pay for. I subscribe to the “do it right the first time” mindset, even if it costs a little bit more. This has to do with getting recommendations from people you trust and trying your best to vet whoever is doing work for you.
Anyways, as I was looking into these home improvement projects, I was looking into whether there was some way to get a deduction or something on my taxes. Unfortunately, no such deduction exists for your own personal residence. This is different if a portion of your home is utilized as your home office, which I will probably talk about later.
However, there are some tax benefits in the future when you sell your house if you kept good records of any improvements you’ve done on your house. Just remember that this has to do with improvements, not repairs. To be technical, it’s called a capital improvement – which means something that adds value to your home, prolongs its life, or adapts it to new uses. For example, adding solar panels and a new roof most definitely qualifies as an improvement.
For those interested, you can read the official IRS document here:
However, is the work on my deck considered an improvement or as a repair? I would argue it prolongs its life, so I think it still counts. Repainting my house and deck probably qualifies as an improvement since it’s a completely different color and also prolongs its life. Whereas if you just did some spot painting some areas, that’s probably considered a repair.
Why does this matter?
Any improvement you do to your house while you live in it can be added to your tax basis for when you sell your house. For example, let’s say John buys a house for $800,000. He lives in it for 30 years. Over the course of the 30 years he makes $100,000 of improvements. Let’s say he remodeled his kitchen and remodeled a few bathrooms. He also put a new roof on the house and added solar panels.
Now it’s 30 years later and he sells the house for $1.2 million. So he bought the home for $800,000, but he put $100,000 into the house.
So his tax basis is not $800,000, it’s $900,000.
So his “profit” when it comes to taxes is:
$1.2 million – $900,000 (not $800,000)
= $300,000 (not $400,000).
Interesting…
However, this may or may not matter to you. As it stands currently, if your profit is less than $250,000 then you don’t have to pay any taxes on the profit. This exclusion increases to $500,000 if you are married and file a joint return. You would then pay taxes on any profit above those numbers.
In the example above, if John is single, then he would have to pay taxes on money over $250,000, or taxes on the remaining $50,000. However, if John is married and filing jointly, he and his spouse would be below the $500,000 exclusion whether he claimed the home improvements or not.
Long story short is that as the length of home ownership increases, the likelihood increases that you will be over the current profit limits of $250,000 and $500,000. Of course, these may change over time as well.
Either way, keeping track of these home improvements may be helpful to ease your tax burden when/if you sell the house.
TL;DR
Keep track of your home improvement projects.
It may be helpful to you to ease your tax burden on your profits when/if your sell.
I think that the longer you own the same house, the higher the likelihood that you will go over the limit.
I just learned all this stuff today, so please correct me on any of this if I’m wrong.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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