by Michael Wiener, E.A.
Most homeowners know that their home entitles them to some federal tax breaks, chief among them, deductions based on mortgage interest and property taxes that they pay annually. However, first-time home buyers and sellers, and even seasoned homeowners sometimes miss some important deductions and credits.
Selling your home: capital improvements that change your cost basis as soon as you purchase your home, you should start a file and save receipts, contracts, or other relevant documentation that show costs for all of your major remodeling and home upgrade projects you make over the years. When you sell your home, you may be able to add the costs of major upgrades to your original purchase price to increase your adjusted cost basis.
The more upgrades, the more you may be able to reduce your capital gains or even show a loss on the sale of your home for tax purposes. The IRS considers the following examples as capital improvements that may be used to increase your cost basis.
Additions: These include new or expanded rooms that were not part of the home you purchased such as extra bedrooms, bathrooms, a deck, garage, porch, and patio. Things like a new lawn or xeriscaping, a new driveway, walkway, fence, in-ground pool, or retaining wall fall into this category. Home systems: Systems include heating and central A/C, a new furnace, duct work, security system, upgraded electrical wiring, water and air filtration, and central vacuum. An outdoor irrigation system and new plumbing such as water heaters and modern pipes are also part of your home’s systems. Installing new siding, windows and doors, a roof, and even a satellite dish can qualify to boost your adjusted basis. Flooring (including carpeting), built-in appliances, and kitchen modernization count toward increasing your basis.
Adding insulation to your pipes, duct work, walls, attic, and floors qualify as upgrades. Most repairs CANNOT be included in your basis adjustment unless they are a necessary part of completing a larger remodeling project. If, for example, you’re having all your windows restored or replacement installed, repairing rotted wood around the window frames could qualify as part of that cost.
TAX CREDITS FOR ENERGY-SAVING HOME IMPROVEMENTS
Most Energy Incentives for Individuals expired at the end of tax year 2013 but the Residential Energy Efficient Property Credit is available through December 31, 2016. Homeowners can benefit from upgrading to certain alternative energy systems such as: small solar energy systems, geothermal heat, residential wind turbines, fuel cells and micro turbines.
Keep in mind that tax credits reduce your home’s adjusted basis by the amount of the credit you receive. Medical home improvements: capital expenses if you, your spouse, or a dependent requires physical accommodations that necessitate remodeling because of a medical disability, the cost could qualify as a medical expense. Architectural and aesthetic improvements to your home do not qualify.
If you take out a loan to make capital improvements to your home (improvements that increase its value, improve its longevity or modify it for new uses), you may be able to deduct the interest on your taxes. Loans for repairs may not qualify for some home improvement loans. However, home equity lines of credit (HELOCs) can be used for a variety of purposes, and some mortgages allow you to make many types of remodels and repairs to make a home livable. Interest for these types of mortgage loans on your main or second home is typically tax deductible.
It is important to keep in mind that documentation is necessary in order to determine whether or not your home improvements or repairs qualify for a tax deduction or credit. Please consult with a tax advisor (such as myself) so you don’t miss out on the possible benefits that may be available to you.
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An enrolled agent, licensed by the US Department
of the Treasury to represent taxpayers before the IRS
for audits, collections and appeals. To attain the enrolled agent
designation, candidates must demonstrate expertise in taxation, fulfill
continuing education credits and adhere to a stringent code of ethics.