How Home Improvements Affect Your Taxes

Taxes are an unfortunate fact of life. However, the tax code includes several provisions that can help homeowners save money when it’s time to file their returns. Making improvements to your home could potentially save you a significant amount of money, both now and when you eventually sell your house.

Tax Deductions Now

If you need to make home improvements for medical reasons, those costs could be tax-deductible. Upgrades such as adding a wheelchair ramp, widening doors to accommodate a wheelchair and adding handrails can be tax-deductible if they’re deemed medically necessary.

You can also get federal tax credits if you make improvements to increase the energy efficiency of your house. Installing solar panels, a geothermal heat pump, a solar water heater or other eco-appliances can lower your tax liability for the year that those items were installed.

If you know when you buy your house that you want to make some improvements, you might be able to have extra money for those projects included in your mortgage. Then you can deduct the interest for the entire mortgage when you file your income taxes.

Reducing Taxes When You Sell Your House

If you’re thinking about selling your house in the future, taxes may eat into the profit you make from the sale. Making improvements to your house when you own it might be able to reduce your tax liability.

When you sell your house, your profit will be calculated by adding the amount you paid for the house, including fees, plus all improvements you made over the years. That total is the adjusted basis. That number is compared to the sale price to calculate your profit.

The lower your profit margin, the less you’ll have to pay in taxes. If you’re single, the first $250,000 in profit from the sale of your primary residence is tax-free. For a married couple filing taxes jointly, the first $500,000 is tax-free.

It’s important to keep receipts for all home improvements, particularly if you’re planning to live in your house for many years and do a lot of work. Having all those records when you sell your house can help you reduce or avoid paying taxes on your profit.

Upgrades Could Help You at Tax Time

Home improvements can make your house more comfortable and energy-efficient when you live there. They could also save you money, either when you file your annual income taxes or when you eventually sell your house. It’s important to keep records of all the money you spend on home improvements and check with your accountant to find out how those upgrades will affect your individual taxes.