Home renovations can be an exciting way to improve your living space and increase the value of your property. Whether upgrading your kitchen, adding a new bathroom, or building a deck in your backyard, these changes can make your home more enjoyable and potentially more valuable in the long run. However, only a few homeowners realize how these improvements can affect their taxes.
While specific home improvements may be eligible for deductions, others can impact your overall tax situation differently. Before you jump into your next renovation project, it’s crucial to understand the potential tax implications. Navigating this complex area can be challenging, but with help from professionals like Tax Law Advocates, you can make informed decisions that align with your renovation goals and financial health.
Renovations That Can Increase Your Property’s Value
Of all the benefits that can be realized from home renovations, this may be one of the biggest. These include new construction, like a new room, remodeling a basement, or even upgrading your kitchen, which always raises the value of your house. On the one hand, this is good news if you ever intend on selling your home in the future; on the other hand, it also means that you may be paying a lot more in property taxes.
In many places, property taxes depend on the size of your home, which is the value that has been assessed. Whenever you make significant enhancements, the local tax assessor may raise your property’s assessment, which means higher taxes. For instance, if you extend your house to annex a new wing or put in a swimming pool around your compound, you will find that your property taxes have gone up. However, it should be noted that not all kinds of home improvement work will lead to a reassessment of the property’s value. Often, pretty superficial changes such as painting or changing lighting will not increase your property’s assessed value much.
This is also an aspect of the value of your home, which can influence your capital gains taxes once you decide to sell the property. Your home also becomes an investment property if the value increases substantially because of your upgrades, and you’ll owe taxes on the profit when you resell. The IRS has allowed $250,000 for single homeowners and $500,000 for married couples to be tax-free; anything beyond that is taxable. Document all the renovations done on your home to reduce your capital gains. Record keeping of all the expenses that accrue to the refurbishment of the house will assist in raising the cost base and decrease the taxable income when selling the property.
Tax Deductions for Home Improvements
Although not all home renovations will benefit your tax situation, specific improvements can be claimed for tax deductions. The most popular ones involve home offices, medical expenses, and energy-efficient improvements.
If you have a space in your home used only for business, you can claim some of the costs of home improvements on your taxes. For example, changing a space to a home office would mean that part of the expenses incurred in the renovation would be tax-deductible. However, the IRS has specific criteria that are allowed for home office use, including the fact that the space is used regularly and exclusively for business. If you satisfy these conditions, you can reduce the renovation costs in proportion to the extent of the home office to the total house.
Changes made for medical reasons can also be financially profitable and allow receiving some tax credits. Suppose you have to make alterations to meet a medical need or a disability- say, constructing ramps for wheelchairs, widening doors, or installing rails in the bathroom. In that case, these costs can be considered medical expenses. However, you can only deduct costs beyond 7.5 percent of your adjusted gross income. For a taxpayer to be eligible for these deductions, it is therefore advisable to keep records and receipts of all the related expenses.
Federal tax credits also extend to homeowners who seek to improve their homes’ energy efficiency. For example, the Residential Energy Efficient Property Credit enables the homeowner to claim a percentage of the costs of installing renewable energy, such as solar power or a geothermal heating system. This credit comes with restrictions on which taxpayers are eligible and the maximum allowable deduction. Still, it is a good credit for those wishing to receive a tax break to reduce energy usage and encourage environmental responsibility.
When to Consult a Tax Professional
Since home renovations have various effects on taxes and how they affect your taxes depends on multiple factors, consulting a tax expert is advisable. While your general knowledge of taxes should be enough to know that your specific renovations increase or decrease your tax credit, a tax expert will be able to explain further how they impact your taxes and whether there are state laws regarding property reassessments. In this case, a professional can help you make the most of your financial decisions, whether doing a minor remodeling or a complete overhaul of your home.
Conclusion
Staying put can improve your quality of life or even raise your home’s worth, but home improvements can lead to other financial surprises — taxes. You need to know so much, from potential hikes in property taxes to potential tax benefits inherent in home improvement. Keeping track of your expenses or consulting with a tax professional is sure to ensure you do not fall foul of the many intricate issues surrounding home renovation taxes. Remember that while home renovations can sometimes be a significant expense, making the right choices for your home and your wallet is possible.
Recent Comments