Where & How to Claim a Home Improvement Tax Deduction
When you’re thinking of a home improvement project, it’s only natural that you’d want to know what’s tax deduction. Reclaiming a portion of what you spent on, say, a bathroom renovation including a new vinyl floor, through a tax deduction makes financial sense. Here’s what you need to know about tax deductions for home improvement projects.
Can You Take a Tax Deduction for Home
Generally speaking, you must wait to take home improvements as a tax deduction until you go to sell your home. The improvements then factor into your home’s adjusted cost. For instance, assume that you paid $200,000 when you bought your home and you spend $18,000 on new flooring and lighting for your home. Your home’s adjusted cost would then be $218,000. If you sold your home for $475,000, you would be eligible for capital
gains on $257,000 rather than $275,000. Since individuals only pay taxes on home profits over $250,000, you would be taxed on $7,000 rather than $25,000 by factoring in your home improvement.
If you make home improvements to a rental property, rather than your personal residence, you can deduct them on taxes. This applies if you rent a portion of your principal residence. So if you convert the basement into an in-law apartment and rent it out, you can deduct the costs on your taxes.
Another exception is if you have a home office (which you must use exclusively for work). Let’s say you converted a spare bedroom to a home office, and you hired a contractor to do electric work or refinish the flooring. These projects are tax deductible using depreciation. Any home improvements made to your entire home which also benefit your business — like that central air conditioner that cools your home office — are
deductible in part.
EnergyStar.gov contains information about what home improvements quality. Browse by the type of improvement you’ve made, such as central air conditioning or biomass stoves, to see whether your project qualifies.
Let’s assume you’ve determined that your home improvement project is deductible on your taxes. How do you go about getting the credit you’re due?
For energy efficient improvements like replacement windows, you’ll claim a relevant federal tax credit, such as the Home Energy Credit. The Home Energy Credit is capped at $500 for your lifetime, and it’s limited to primary homes that are not new construction. If you put in energy-efficient windows in a new construction home, you won’t qualify. If you retrofit a historic home, you can take a credit of up to $200.
If you’ve got an energy efficient improvement that qualifies for a tax credit, you may be able to earn a rebate from your state, too. This is different from a tax credit because it gives you money back. Search for energy, water, solar, or other rebates in your state to see whether your improvement qualifies, then follow the application instructions.
For home office expenses, you’ll need to detail the expenses on your Schedule C, then use a depreciation formula so you’re depreciating the expenses over a set period of time. This way, you’ll earn a small tax credit every year. For whole-home projects that also benefit your home office, you’ll need to express the expense proportionally. For instance, if your
home office represents 15 percent of your home in terms of square footage, you can deduct 15 percent of the home improvement cost.
Since some projects are tax deductible, it pays off if you research tax credits and local rebates before you plan your home improvement. It may be worth it to select a different model pellet stove or central air conditioner if you’ll earn a rebate than save a little up front, yet not qualify for tax savings.