At last, the sun is shining, the birds are chirping and it’s time to kick back and enjoy the summer. But wait, do you cringe every time you look around your home and backyard? Are the turquoise and pink décor in your kitchen seriously out of date? Maybe it’s time for a few home renovations this summer. Before you begin, consider not only what they will do for your peace of mind, but also what they will do for your bottom line.
In general, you cannot deduct renovations for the home you live, but there are a few exceptions. Home improvements that are not tax deductible can be added to the cost of your home when you sell, reducing the amount of any gain that is subject to capital gains tax. This applies to all improvements to the home, but it doesn’t include small repairs.
The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life. For instance, patching your roof is just a repair, but replacing your roof is an improvement you can add to the cost of your home lowering the amount subject to capital gains if you sell your home.
Wouldn’t it be great if Uncle Sam could pay for some home improvements? In some instances, home improvements can create a tax deduction or credit that reduces your tax bill. Here are four areas where you can take a tax deduction or tax credit for improvements you make to your home.
Medical necessities. If a debilitating condition has confined someone in your family to a wheelchair, the cost of adding wheelchair ramps to your home is probably a tax-deductible medical expense and so is anything else that’s needed to adapt the home: widening doors, lowering cabinets, adding handrails in the bathroom, etc. If a family member has asthma, then a doctor may recommend you install an air cleanser throughout the home. That too would likely be a medical necessity.
Home improvements that are considered a medical necessity can be a medical expense deduction. The IRS allows you to deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for the 2018 tax year. In the 2019 tax year, the amount goes back up to 10% of adjusted gross income.
Energy tax credits. Tired of paying high electric bills? Consider installing solar energy panels in your home. You’ll enjoy a reduction in your energy costs, and you’ll get a solar-electric tax credit of 30% of the costs if the panels are placed in service by the end of 2019. If you miss that deadline but still install solar panels by the end of 2021, you will get an energy credit at a lower percentage. If you have a vacation home, solar panels installed in that residence are eligible for the tax credit as well.
The costs of solar water-heating systems qualify for the credit if at least half the energy used to heat the home’s water comes from solar (heating units for swimming pools and hot tubs don’t qualify). Fuel cells, wind-energy systems, and geothermal heat pumps installed in your home also qualify for the energy tax credit if they meet certain specifications.
Here is the tax credit breakdown:
- 2019: The tax credit is 30 percent of the cost of the system.
- 2020: Owners of new residential solar can deduct 26 percent of the cost of the system from their taxes.
- 2021: Owners of new residential solar can deduct 22 percent of the cost of the system from their taxes.
Interest deductions. If you take out a loan secured by your principal residence to make improvements to your home, you can still deduct the interest on the loan.
Property taxes. If your home improvements increase the value of your home, they may trigger an increase in your property taxes. Though higher property taxes take more out of your pocket each year, they qualify as an itemized deduction on your taxes, up to total deductible property taxes which are now capped at $10,000 for state and local property, income taxes or sales taxes in aggregate.
Don’t worry about knowing these tax rules. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent and get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can also review, sign, and file your tax return.