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Turn Home Improvements into Deductions
Tax season has arrived and whether you’re expecting a check or sending one to Uncle Sam, it’s prudent to ensure that no tax deduction is left unturned. Tax deductions are a reduction of taxable income, therefore lowering your tax liability and potentially increasing your tax refund. It’s important to know what qualifies and what should be left off your return to stay in Uncle Sam’s good graces.
Bring Home the Business
If a portion of your home is dedicated to business, i.e. a home office, then you could be eligible for the home office deduction. Like most tax laws, there is a fine line. The IRS does not count sitting on your laptop on the couch as a home office. The space must be regularly and exclusively used as your principal place to conduct business.
If this applies, then you can deduct the percentage of your home that is used. For example, if you use 20 percent of your home as an office, you may depreciate 20 percent of the cost to upgrade your home heating and air conditioning system or 100 percent of the cost of home improvements specifically for the office space, such as carpentry work for built-in bookshelves.
From there, you can also write off “ordinary and necessary expenses” for your job, including professional certification fees, subscriptions to trade journals and office equipment for the sole purpose of business. Road warriors and overtime workers note – this deduction doesn’t apply if you work in an office five days a week but take work home on weekends.
Landlord of the Manor
Landlord of the Manor
Another way to make tax time work for you is by renting out a portion of your home. Any home improvements, specific to the rental area, such as repairing a window in the room, installing carpet or drapes, painting the room or providing the tenant with furniture, can be fully deducted. In addition, if you pay extra Homeowners’ insurance premiums because you’re renting out a room, the full cost is a deductible operating expense.
Keep in mind that any rent received will be counted as taxable income so run the numbers to ensure that this is a deduction worth pursuing
Long-term Benefits
Finally, home improvements can be used as a tax deduction when you sell your home because the cost is added to the tax basis. "Basis" means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll receive when you sell your home.
For example, John purchased his home for $500,000 and sold it 25 years later for $900,000. During the time he owned his home, he made $100,000 worth of improvements, including a new bathroom and kitchen. These increased his basis, or amount of money put into the home, to $600,000. He subtracts his $600,000 basis from the $900,000 sales price to determine his gain from the sale – $300,000. Only this amount is subject to tax.
This information is intended to be a guide and any specific questions should be discussed with a tax professional. The goal is to bring possible tax deductions to light, keep your hard-earned dollars close at hand and Uncle Sam happy.
Long-term Benefits
