Claiming Home Repairs On Taxes – Not all home renovations can be deducted from your taxes, but there are some smart ways home improvements can provide tax benefits. Alistair Berg/Getty Images
But wait! You don’t need to turn off the computer in disgust and walk away just yet. Although the cost of regular, boring improvements isn’t deductible on your return, there really are some smart ways to recoup some of your home costs by knowing the ins and outs of a tax return. From energy efficiency upgrades to upgrades to the parts of your house you use as a home office, we may find a deduction for the work you’ve done at your place.
Claiming Home Repairs On Taxes
Let’s start by looking at a great example of finding an “improvement” deduction right in the middle of another payoff: your mortgage.
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Where do home improvement budgets come from? Well, they often come from savings and possibly a loan or two. None of these will help you in the tax department. As we said, home improvements can’t be deducted like, for example, tax preparation fees or medical expenses (although we’ll see later how medical expenses can lead to home improvement deductions).
A smart way to budget your home improvement budget is to include it in your mortgage when you buy a home. This may not seem like the coolest plan; After all, you’re still paying the cost of repairs, and taking out a larger mortgage to cover those repairs means you’ll pay more interest. But remember, if you itemize your deductions, you can write off the interest cost on your mortgage. Add the cost of improvements to your mortgage and that payoff can increase.
Single people and married people filing jointly can deduct home mortgage interest on the first $750,000 of debt, while people married but filing separately can deduct interest on up to $375,000 each. Also note that you can deduct interest paid on a home equity loan if it was used to build or “substantially improve” a home [sources: IRS].
While some of the tax benefits for energy efficiency improvements expired in 2013, there are a couple of ways to reduce your energy footprint while still getting some tax savings.
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One is a tax credit for energy efficient systems in your home. It’s a one-time credit (meaning you can’t take it every year), but it allows you to pay off 30 percent of the cost of any solar, geothermal, wind, or fuel cell technology you’re adding to your home (the La credit cellular technology applies only to a primary home), as long as it was in operation at the end of 2019. Even better is that 30 percent applies to labor and installation, as well as the product itself. After that, however, the credit gradually decreases, so that improvements made to the service in 2020 get 26 percent and those in 2021 get 22 percent. [sources: Pérez, TurboTax.]
You can also get a non-commercial energy property credit to install home insulation, replace exterior doors, or replace a boiler, among other items. The credit is 10 percent of the cost, with a maximum of $500 from 2006 to the present. There are also many other caveats, which you can find in this TurboTax article.
So this is a little complicated to understand, but stay with us: When you sell your home, you may be able to get some tax relief for improvements you made before the sale. At first glance, this seems like exactly what we told you was impossible: a tax break for home improvements. But it’s a little more devious than that.
When you sell your home, the term “tax basis” refers to the profit you make. And the idea is that any improvements you make to the house while you own it will reduce profits, leaving you less to pay taxes on. Please note that if the home is your primary residence and you have lived there for more than a year, you will only be taxed on the gains you make from selling a home if your gain is more than $250,000 for a single person or $500,000 .for a married couple filing jointly [source: IRS].
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So if John buys a house for $500,000 and makes $50,000 in improvements, his tax basis is now $450,000. If he sells the house for $900,000, he will pay taxes on the $350,000 gain. -not $400,000. Note that he could still subtract the $250,000 that won’t be taxable from this amount [sources: Anspach, Fishman].
So here’s a home improvement deduction that, admittedly, is a bit of an exaggeration in its use of the word “home.” But since many people run a business on property they own or rent, it seems like a good idea to point out some ways property improvements can be deducted as a business expense.
Again, this applies to improvements he makes to a property he uses for his business. It is not necessary for him to own the land or the building; Renting works too. But you do have to know the difference between a repair and an improvement, because the rules are a little different. If you make a repair, you can deduct the cost as a business expense, which is pretty simple. However, if you are improving, then it is a little more complicated. The cost of the improvement must be depreciated over its useful life [source: IRS 946]. So you can deduct the cost of repairing cracks in the parking lot, but if you replace the entire parking lot, you’ll probably have to depreciate the cost over several years.
Another home improvement that might deserve quotes around “home”: any improvements you make to your home office. Much like the business expense deductions you can make for any improvements to property you own or rent, the home office is considered a space where any improvements or repairs are subject to deductions.
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But let’s be cautious. Remember that you can’t just claim any old space as your home office; It must meet some strict IRS requirements (i.e. it cannot be a space that the rest of the family uses recreationally). Improvements to a home office space are fully deductible, as long as 100 percent of that space is used exclusively as an office. Just remember that you’ll probably have to depreciate them too, unless they’re repairs.
And here you have an extra advantage. Let’s say you add a new air conditioner or water tank to the house. If you use 15 percent of your home as office space, you can depreciate 15 percent of the cost [source: Fishman].
Owning a second rental property is not that different, tax-wise, from owning a business. (That’s according to the IRS. You could point out that your real job would never require you to get up in the middle of the night to fix a toilet that’s stuck in the bathtub. Unless that’s really your job, in which case You’re just a glutton as punishment.)
Just like a home office space, you can write off the cost of repairs to your rental property and then depreciate the improvements. That’s pretty basic and pretty interesting. But keep in mind that if you rent out a portion of your own home, it works like the home office deduction. You can write off the cost of repairing “your” home if it’s in the rental area, and you can write off improvements for the percentage of the space used for rental [source: Fishman].
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It’s not exactly the kind of home improvement you plan with paint chips or plans, but the fact is that losses from casualties, disasters or theft can be deducted on your tax return where applicable. No, it won’t allow you to deduct the cost of repairs or improvements, but getting a discount on the damage or loss can be helpful when budgeting for restorations.
First, to qualify to claim losses from natural accidents, the disaster must be a “federally declared disaster” by the President of the United States [source: IRS 515].
Second, keep in mind that you must itemize your deductions to write off any losses; That means you can’t take the standard deduction on your return. Also remember that you must practically take the loss in the year the incident occurred, unless otherwise specified by a federally declared mandate. You can then claim it as a loss from the previous year. (That makes sense if the disaster occurs in January and you file your taxes in April, for example.) And don’t forget: You can’t deduct costs if you are reimbursed by insurance or some other benefit program [source: IRS 515].
Although not directly related to renovations, it is important for homeowners to remember that they can deduct their property taxes on their returns. Now, remember that the property tax will not appear on your W-4; Typically, people include their property taxes in
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