Tax Deductions and Home Renovations: Your Ultimate Guide is here, just in time for tax season.
Are you a homeowner who has recently undertaken renovations to accommodate for moving a loved one in home, or you have made upgrades to reduce your carbon footprint? You may be wondering where you stand to save in taxes. The answer to these questions depend on the nature of improvements and whether they would be considered a tax credit, tax incentive, or may be eligible for a tax rebate. Some of these improvements and savings will only come into play when you sell your home and others at the end of this tax year. Let’s explore how home improvements may be eligible for tax credits, incentives, and rebates.
But first, What Exactly is Capital Improvement?
The Internal Revenue Service (IRS) defines a capital improvement an alteration or addition to your home that meets one or more of the following criteria:
- Increases the overall value of your home.
- Extends the useful lifespan of your home.
- Adapts your home to serve new functions or uses.
It is important to note, that in reality these are deductions that have to be completed for more than one year and are realized when you sell the property. Installing hardwood floors, prior to selling would not qualify you for a capital improvement deduction.
So, what DOES Qualify?
Capital improvements are not routine repairs. Repairs are conducted to restore your property to its original condition or to prevent further damage; examples would be a new roof, repainting, or installing a new drainfield for a septic tank. Alternatively, capital improvements are more significant and increase the value of a home. They also come with a higher price tag. Some examples that add value to a home should not be foreign to my audience, including, adding new rooms like baths and beds, adding landscaping including driveways, swimming pools, or fences, and exterior upgrades like new siding storm windows and a security system. This also includes system improvements like air conditioning, sprinkler systems, kitchen remodels, built in appliances, and fireplaces.
When Can You Deduct the Costs of Capital Improvements?
You can deduct the costs of qualifying capital improvements, however you cannot claim deductions until you sell your home. The cost basis is the initial value you paid for the asset, which, in the case of property, includes not only the purchase price but also associated fees and expenses.
Keeping Track of Capital Improvement Costs
It is imperative to maintain a record of all associated costs with capital improvements from invoices to dates. This includes retaining receipts, purchase orders, and any relevant documents you receive.
What about Tax Breaks for Environmental Upgrades in 2023?
One of the most frequently asked questions I get on The Main Line is, what are the tax breaks and incentives for upgrading to a more energy efficient home. I have a complete list below, and you will be very surprised how generous these are. It is important to keep in mind that unlike capital improvement tax deductions, many of these savings are real and immediate in this tax year.
- Heat Pumps: An energy efficient heat pump can earn you a 30% tax credit, up to $2,000.
- Windows and Doors: Replace doors and windows for sustainable versions for a 30% credit on the cost (increased from 10% in the previous year). The credit is capped at $600 for windows and $500 for two doors.
- Insulation: Upgrade your insulation for a 30% credit (up from 10% last year).
- Electrical Upgrades: Up to 30% of the cost for an electric panel upgrade, up to $600.
As you can see, improvements that qualify as tax breaks and credits can be realized immediately in terms of energy efficiency and later in terms of resale value. When you are making a budget, consider the overall impact of improvements on value and also the tax considerations. In some instances this can help you prioritize the project. When I have sellers who are thinking about selling in five years, some capital improvement projects like fixing a roof that do not qualify for a tax deduction, definitely add to the value of the home, whereas remodeling a kitchen might incur more risk due to buyer demand.
It is always a good idea to consult a tax professional prior to making a substantial investment in your home. It is also a good idea to contact your realtor to understand the market and what is in most demand from buyers if you are thinking about selling in the next 5 years. Are you thinking about selling and want to know what your home is worth on The Main Line PA? Contact Kimmy Rolph Real Estate.
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