If you are contemplating carrying out major improvements to your home, you need to bear in mind that not all the work you do may be considered an improvement from the tax angle. Things that are done to maintain a home’s good condition without adding value or prolonging its life (like routine repairs and maintenance) are not considered to be capital improvements as per the Internal Revenue Service (IRS) regulations which stipulate that capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses. Take time to research and find out beforehand what will be the tax ramifications of any major home improvements you are planning to do.
Effect on capital gains
Remember that the money you invest in improving your home over the years gets added to its purchase price or cost basis. In the event that you sell, these investments could potentially reduce the amount of profit you make, thereby reducing your capital gains tax liability.
The IRS has strict guidelines on how to claim a tax deduction for home improvements so it would be prudent to obtain advice from your tax consultant or the local IRS office before you hire a contractor or start any home improvement.In general, if you make a profit on the sale you may be able to exclude the gain up to $250,000 from your income if you are single ($500,000 on most joint returns) from your taxable income if you’ve owned and used the home as your residence for two out of the past five years.
Effect on property taxes
Making major improvements to a home most often comes under scrutiny and an immediate reassessment by the assessing authorities for the simple reason that many such improvements (like adding another bathroom) require building permits, copies of which are invariably sent to the assessor. This could mean paying higher property taxes if, as a result of the improvement, your home is placed in a higher category for assessment purposes.
However, some improvements that require a building permit are not automatically assessed. For example, repairs like fixing new ceilings or walls, replacing porches or repairing original siding of the house, come under this category. Converting an existing space to a new use allows the footprint of the house to remain the same but is almost always less of a tax liability than addition of square footage.
There are many other improvements, especially those outside the house, that do not need permits and can cosmetically improve the aesthetic look and livability of your home and improve its curb appeal without increasing your property tax liabilities.
The modus operandi of assessment of the property value varies from state to state or city, so before embarking on major home improvement projects it is wise to ask your local assessor what will be the tax implications and impact on the property value of your home, after the proposed improvements. In doing so, you will not be caught off guard and you will also be able to take advantage of incentives offered for remodeling.
Just in case you feel that the valuation of your property by the assessor has increased to an unreasonable extent, there’s nothing to prevent you from appealing and challenging the assessment done.
What about tax credits and other incentives?
Many home improvements, especially the Eco-friendly and energy-efficient ones, trigger tax credits at federal, state, city and local utility levels. You need to keep abreast of developments in this regard by visiting the relevant websites to verify which tax credits and incentives you qualify for. Keep in mind that tax credits provide significant savings to the homeowner. While a tax deduction for home improvements can reduce the amount of income on which tax is payable, a tax credit directly reduces the tax itself. However, when using any credits, you must reduce your home’s cost or tax basis by the amount of the credit.
One final thing to remember!
There’s one important thing to remember when you begin your home improvements – maintain accurate records of your expenses – systematically file and save all your receipts not only till the time for tax payment comes around,but till the time you may decide to sell your home.It will be of enormous help when the time comes to claim your home improvement tax deduction or to claim exemption from capital gains tax.
About The Author:
Michael has a natural flair for interior and exterior home decor. He believes home improvements should not only be aesthetic but sensible and energy-efficient as well. Michael is a freelance writer who has had 12 years of experience as an interior designer. He currently writes for Dallas Champion Window and other home improvement companies.