Part of the coveted American Dream is to buy a house with a white picket fence and settle down in your own little corner of the world. In an ideal world, we would find our dream house that’s just waiting for us to move in; all the appliances would be brand new, the paint would be to our likings, the flooring would be pristine, and the yard would be like our own personal oasis.

Unfortunately, unless you have the money to buy a brand new house, or the patience to search for the one, you may have to settle for whatever is in your budget.

Sure, the home you buy may not be exactly what you’d like, but you can make various home improvements that will help turn an older home into your home. Sometimes, home improvements can even make your home more energy efficient, safer, and in some instances, create more livable space for your family.

If you’re worried about the cost you’ll be pleased to know that some of these home improvements can be used as a tax deduction.

Tax Deductions for the Homeowner

Homeowners have several tax deductions they can receive when they itemize their claim. These tax deductions cover things like:

·         Annual property taxes levied by local authorities

·         Home mortgage interest payments

·         Mortgage points from refinancing a house

·         Mortgage points, with each point being equal to 1 percent of the loan amount

·         Moving costs, if the new location is more than 50 miles from the previous one

·         Real estate taxes

·         Uninsured losses from floods, fires, storm damage, theft, or earthquakes

If you’re fortunate enough to have a vacation or a second home (or maybe you’ve inherited a deceased family member’s home), and the property hasn’t been rented out more than 14 days during the year, you can deduct the property taxes and mortgage interest from those properties as well.

People are under the assumption that if you’ve upgraded your kitchen in 2017, you can claim those costs on your 2017 taxes. That isn’t true. The truth is, if you keep track of any home improvement costs you make throughout the time of living in your home, you may be able to reduce your taxes when you decide to sell the home.

The improvements you’ve made to your home increases the basis in the home, which can reduce the amount of the profit you’ve made when you’ve sold the home. These improvements can help you get under the home sale exemption, thus avoiding capital gains completely.  

What Is the Home Sale Exemption?

TubroTax describes home sale exemption as:

“...qualified sellers do not have to pay capital gains on appreciation of their primary residence when it is sold for a profit of $250,000 or less if filing as single and $500,000 or less if filing married filing joint.”

What this means is that because the renovations you’ve made increases the basis of the home, you can subtract the cost of those renovations from the profit you’ve made once you’ve sold the home. Even if it doesn’t get you completely under the $250,000 (or $500,000 mark), it can reduce the taxable portion of your profit.

Can I Deduct Any Improvements?

While not every home improvement project will lead to getting more money back in taxes the year you made the improvements, there are some instances where you can claim those renovations on your taxes.

Qualifying renovations include:

·         Using mortgage to make home improvements

·         Creating a home office for a business

·         Medically necessary improvements

·         Improvements for energy generation

Using Mortgage for Home Improvements

You can reduce the cost of home renovation by making the desired improvements to the home when you first buy it. Should the mortgage you take out to purchase the home includes extra money to make those renovations, the acquisition cost is going to be included in the amount. You can then deduct the interest from that amount from your taxes as part of the mortgage interest deduction.

Creating a Home Office for Business Use

If you have a business, you can deduct 100% of the cost to renovate your home for a home office. This home office must be used only for business purposes, and be used regularly. What is an example of a home office renovation? Let’s say you have a garage and you want to turn that into your home office. You need some work done in that space (finishing the garage, building and installing shelving, etc.), you can claim that cost as a business expense.

Also, if you make any home office renovations that increase the overall value of your home, you can claim a percentage of that. An example of this is if you were to use 30% of your home as an office, you can claim up 30% of the cost of upgrading your HVAC system, or 30% of the new windows you installed throughout the house.

Medically Necessary Improvements

Sometimes a home will need alterations in order to accommodate a disabled family member. These improvements can include:

·         Bathroom modifications

·         Widening doorways and hallways

·         Ramps into and out of the home

·         Lowering cabinetry

·         Addition of handrails

·         ...and more

This doesn’t mean you should go hog wild with these improvements. You can only deduct these improvements if they are reasonably priced and for a specific medical purpose. Any expenses that have been tacked on for aesthetic or architectural purposes cannot be deducted. Unfortunately, if the expenses for these improvements will improve the value of your home, you cannot claim it as a medical expense.

Energy Generation Tax Credits

If you’re looking to lower your taxes, you will want to take advantage of energy tax credits and install a qualified energy generating system into your home. There are federal tax credits that equates to 30% of the cost of installing solar water heaters, solar panels, small wind turbines, or fuel cells that have been used in an existing home, or a new construction home.

The tax credits for solar power are good until 2019 and then will reduce in value each year until the end of 2021. The 30% tax credit will include the cost, labor, and installation. With the exception of fuel cells, there is no limit included with this. This means, if you have a farm and you purchase a $10,000 small wind turbine, you’ll receive a $3,000 tax credit right away. Keep in mind, this doesn’t include any savings you’ll see in your electric bill.

Conclusion

Owning a home can be very exciting and it’s a great feeling when you walk through the door of a home you’ve worked hard for. Sometimes the house you buy isn’t going to be exactly how you’d like it, or there are life changes and someone becomes disabled, or you become your own boss, and need a dedicated office. There are some improvements you make to your home for these life events or situations that you’ll be able to claim on your itemize taxes.

If you’ve made improvements that increase the overall value of your home, you may not be able to claim the costs until you sell your house. Those claimed costs will go toward the home sale exemption, bringing the profit of sale closer to (or under) the $250,000 or ($500,000 for married couples filing jointly) tax exempt.