Are you looking to renovate your home? Usually, you can’t expect to deduct anything from your Federal tax return just because you decided to make changes to your home.
But certain home-improvements are tax deductible and can be utilized to reduce the amount of tax you pay to Uncle Sam.
There are both tax credits and deductions that can be taken when the purchase was made or afterwards. Let’s look at them.
Use Your Mortgage to Improve Your Home
If you’re buying a home, then you can reduce the costs of your renovation project by making the changes when you purchase the home.
Sometimes a mortgage will also include money for any changes you need to make.
But the key is this can be added to the price you paid for the home. Therefore, you can claim any mortgage interest as part of the mortgage interest deduction.
Making Improvements for Medical Reasons
There are home improvements you can also make that technically count as medical expenses. The catch is they must be considered a medical necessity.
For example, you can install entrance ramps, create modified bathrooms, lower cabinets, widen doors, add handrails, and create special doors. These are all improvements that can be deducted through the medical expense’s deduction.
The deductions must be considered reasonable and must have a practical use. Architectural and aesthetic purposes don’t count.
However, any improvements designed to increase the value of your home can’t be deducted through the medical expense’s deduction.
Get Tax Credits for the Way You Generate Energy
Certain energy-generating modifications can also allow you to lower your taxes. Energy tax credits can be worth up to 30% of the cost of installation.
These credits apply to improvements like solar panels, wind turbines, fuel cells, geothermal heat pumps, and solar-powered water heaters. All these credits were valid through the 2016 tax year. The solar credits, though, were extended to 2019 and then are available on a reduced basis until 2021.
Green energy systems may also be eligible for tax credits on second and vacation homes. Fuel cells are the exception to this.
The 30% tax credit applies to both labor and installation costs. There are no maximum limits on the amount refunded, other than for fuel cells. For example, if you spend $20,000 on installing new solar panels, you would get a credit for $6,000.
You must apply for this tax credit during the tax year that you have them installed. You must also submit a Manufacturer Certification Statement. You should visit the IRS website for energy tax credits for further information.
Exclusion on the Sale of Your Home
There’s also a home sale exemption to consider. A qualified seller can avoid paying any capital gains tax on any profits they make when they sell their primary residence. This applies to a profit of $250,000 in profit for a single taxpayer and $500,000 for a married couple filing jointly.
The reasoning behind this is that renovations will reduce the amount of profit