How home improvements can improve your tax bill

If you add value to your home, you may reduce your taxes, if you sell the house for a profit.

By MSN Real Estate partner Mar 31, 2014 10:15AM

Saw and blueprints (© Vstock/age fotostock)By AJ Smith, Credit.com

 

There are some special tax benefits homeowners get for owning a home. Homeowners can deduct their mortgage interest, points they paid as part of the financing process and interest on any home improvement loans they take out — loans that are then used to make capital improvements or those that increase the value of a home.

 

The cost of any actual improvement cannot be deducted from your taxes. But it can have a tax benefit.

 

 

 

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Repair versus improvement

First, let's be clear what we are talking about. Improvements add value to the home, prolong the life of the home considerably or adapt it to new uses. This is how the Internal Revenue Service defines an improvement. This is as opposed to a repair. A repair is something that simply keeps your home properly maintained. So while painting your home or fixing leaks count as repairs, putting on an addition or installing a new roof are improvements. Other examples of improvements include finishing a basement, paving your driveway or installing new plumbing or wiring.

Add to the tax basis

The cost of home improvements can add to the value of your home. The tax basis of any asset is usually the cost. But when you buy a house, this includes the improvements you make in addition to the initial price you paid. The actual cost of home improvements, including for materials and labor done by others than yourself, is added to your basis.

 

By adding value to your home, the improvements may reduce the tax you owe if you sell your home for a profit. This is because they reduce how much you are making on the sale. You don't simply subtract the price you paid for the house from the amount you are getting for selling the house. You add the cost of the improvements to the price you paid for the house and subtract this new basis from the price you are getting for selling the house.

Tax laws generally allow a single person to profit up to $250,000 on the sale of a primary residence without adding it to their tax filing as income. The amount is up to $500,000 if you are married and file a joint tax return.

 

Depreciate the costs

You can also depreciate home-improvement costs, or deduct the cost over several years, if you use a portion of your home for something other than as a personal residence. This would mean if you rent out a room in your home or work out of a home office.

The IRS has specific criteria for what constitutes a home office. You must have a legitimate business and you must regularly use that part of the home exclusively for conducting business. You also must be able to prove that your home is the principal place of your business. This all applies mostly to the self-employed. If you work from home for an employer, it must be for the convenience of your employer and you must not charge your employer rent for the use of the space in your home.

 

If you do qualify, you can deduct the cost of any improvements you make to that part of your home. If you make a home improvement, you can deduct whatever portion of that cost is attributed to the home office. So if you use 30 percent of your home as your office, you can depreciate 30 percent of the cost for the improvement, such as a new central air conditioning system.

The other way to depreciate home-improvement costs is by renting out part of your home. Therefore, part of the improvement costs are considered a rental expense. As with the home-office deduction, you can depreciate the improvement cost according to the percentage of your home that is used as a rental.

 

An exception

There is a situation when a home improvement may have an immediate tax benefit. A portion of some energy-saving home improvements can count toward tax credits. A tax credit, as opposed to a deduction, is subtracted directly from the amount you owe the IRS.

 

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11Comments
Apr 12, 2014 6:58PM
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Typical MSN article.   Small tidbits of truth imbedded in a page full of fluff.  I certainly hope you do not decide to give tax advice for a living.   The interest on a loan for these improvements must be secured by the home or they are not deductible.  The tax basis of any asset includes the improvements.  I will give you one point, it has to be an improvement and not simply a repair.  For the home office, you can not have an office else where either so if you work from home for the convenience of your employer but you still have an office at the employer's site, bye bye home office deduction.

Stick to writing fluff and leave the tax advice to the experts.

Apr 12, 2014 6:31PM
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And yet another misleading article from a msn writer........Colonel, Brandon, and John Doe have it right.  The cost of any improvement you make to your property will be added to the assessed value and property taxes will be collected annually on it.   Depending on where you live this tax rate can range from less than 1% to over 3-4% per thousand or more.  Simply put taxes will be 1 to 4+ dollars per thousand dollars of added value paid every year.  So a ten thousand dollar improvement will result in $10 to $40+ more in taxes each year.   
Apr 12, 2014 12:52PM
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This article is misleading as most improvements add little to the selling value of the home and most people avoid the federal tax by selling after they reach 55 or defer the tax by buying another house until they reach 55.  Most improvements at least in New York State will require a permit which will lead to an increased appraisal by the assessor and higher property taxes. where I live in Upstate New York the combined annual real property (local and school) tax is  roughly 3% of the actual value. A 33,000 dollar improvement will cost you a thousand dollars more a year.
Apr 12, 2014 11:53AM
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I made many improvements to my home in NJ.  I had to sell three years later when I lost my job.  By then, my property taxes had risen more than 600 a year and I sold the house, improvements and all, for less than I paid for it.  I really miss the house and it was a far better one when I left it. 
Apr 1, 2014 4:18AM
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You left out the part about how the improvements raise your personal property tax.
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