If you've had your eye on an expensive home renovation project, but you're wincing at the cost, here's some good news - there can be a variety of tax benefits out there that can help defray the cost of your remodel. While the federal government is relatively stingy when it comes to outright deductions, there are still a variety of tax advantages available for the savvy home renovator.
Let's take a closer look at some of these benefits.
Renovations That Qualify As Medical Expenses
The IRS will allow you to deduct any improvements made to your home as long as they are deemed a medical necessity. These improvements include bathroom modifications, guard rails, lowering cabinets and widening doors. To qualify for this deduction, your improvements must be judged to be strictly medical, rather than aesthetic in nature.
Energy Tax Credits
A federal tax credit of 30-percent is available for those who install qualified solar water heaters, heat pumps, solar panels, wind turbines etc. The 30-percent credit is unlimited, and applies to cost and installation. It must, however, be taken the year the new equipment entered service.
Lowering Your Taxes at the Time of Sale
If you're single, the first $250,000 profit you make on your home sale is tax exempt (if you're married the exemption is $500,000). Anything above this is subject to capital gains tax. Home renovations increase your tax basis, so any improvements you undertake should reduce your tax exposure by lowering the percentage of the sale price that's counted as profit.
Interest Deductions For Loans
Certain types of home improvement loans may qualify you for interest deductions. For example, if you fund a remodel using a home equity line of credit or a FHA 203(k) mortgage, you may typically deduct the interest at tax time.
Rolling Home Improvements Into Your Mortgage
If you have a list of renovations you'd like to make at the time of your home's purchase, you can roll additional money into the loan to pay for those improvements. You can then deduct the interest on the full amount of the mortgage (including the added cost of the renovation work) as part of your regular mortgage interest deduction.
The Takeaway
While pure tax deductions for renovation work are hard to come by, you can still lower your tax burden by taking advantage of the programs and strategies outlined above. By doing so, you can pay for the renovations you want without breaking the bank.
