03Apr
0

Homeowners enjoy several key tax benefits simply by owning their home. They may deduct the interest off their mortgage, points they paid as part of the loan process, interest on loans taken out for the purpose of home improvement, loans that are subsequently used for capital improvements, or ones that actually increase your home’s value.

The actual cost of an improvement is not allowed to be deducted from your taxes, although it may have a tax benefit. Here’s how.

Home improvement vs. home repair

There’s a big difference between home improvements and home repairs. Home improvements add value or prolong the home’s life. This is what the Internal Revenue Service considers a home improvement as opposed to a home repair.

A home repair is more along the lines of maintenance as opposed to improvement. So fixing a leaky roof or painting are both considered repairs, but installing a brand-new roof or adding on a room are actual improvements.

Other examples of home improvements include installing new wiring or plumbing, repaving your driveway, or finishing a basement.

Tax basis

The expense of implementing home improvements can add a great deal of value to your home. Usually, it’s the cost of an asset that’s the basis for taxation.

However, when you purchase a home, this also includes any improvements you incorporate along with the original price you paid. The actual amount of money you spent on the improvements, including hired labor and materials, is added to your tax basis.

Because you added value to the home, the improvements may reduce your taxes if you sell your home and make a profit, since they reduce the amount you made selling your home. It’s inaccurate just to subtract the original price you paid for your home from the amount you made selling it.

Instead, you add the home improvement costs to the original price you paid for your home, and then subtract this figure from the price you receive for selling your home.

The tax laws usually allow a profit by as much as $250,000 for a single person when he or she sells the main residence without counting it as income. If you’re married and also file jointly, the amount goes up to $500,000.

Cost depreciation

If you use a part of your home for any reason other than your personal abode, you might also depreciate home improvement expenses or deduct them over the course of several years. An example would be if you work from a home office or rent out a room.

The IRS has certain criteria for what qualifies as a home office. The person must have a legitimate business and regularly use that specific part of the home just for doing business. The taxpayer must also prove that the home serves as a headquarters for the business. Obviously, this mostly applies to those people who are self-employed.

An exception to the rule

There are certain circumstances when a home improvement may indeed qualify for an instant tax benefit. If the home improvements were geared toward energy efficiency, they can count as a tax credit. A tax credit, as distinguished from a deduction, is directly subtracted from how much you owe the Internal Revenue Service.

AROUND THE WEB

Leave a Reply