Tax Benefits of Home Renovations

While home renovations aren’t typically fully tax-deductible, several strategies can help you minimize your tax burden. Here are some options:

 

Mortgage Interest Deduction

When you finance your home purchase, the interest you pay on your mortgage is typically deductible. But did you know that this deduction can extend to home improvement loans as well?

• Purchase-Time Improvements: If you bundle home improvement costs into your mortgage, the interest on that portion becomes deductible.
• Equity-Based Financing: Loans secured by your home, such as home equity lines of credit or cash-out refinancing, can qualify for the interest deduction if the funds are used for home improvements.

 

 

Medical Expense Deduction

Certain home improvements can be categorized as medical expenses, especially if they are necessary for a person with disabilities. These modifications can include:

• Accessibility Features: Ramps, widened doorways, and lowered countertops
• Bathroom Adaptations: Grab bars, raised toilet seats, and walk-in showers

 

To claim these expenses, you must itemize deductions on your tax return and meet specific IRS guidelines.

 

Energy Efficiency Tax Credits

Investing in energy-efficient home improvements can not only save you money on utility bills but also reduce your tax liability. The federal government offers tax credits for:

• Renewable Energy Systems: Solar panels, wind turbines, and geothermal heat pumps
• Energy-Efficient Appliances: High-efficiency heating and cooling systems, water heaters, and appliances

 

Home Sale Exemption

When you sell your home, you may be eligible for a capital gains ta exemption. This means you won’t have to pay federal taxes on the profit from the sale, up to a certain limit.

Home improvements increase your home’s basis, which is the original cost of the home plus any capital improvements. A higher basis can reduce the amount of profit you owe taxes on.

 

While this information provides a general overview of potential tax benefits related to home renovations, it’s important to note that individual circumstances can vary significantly. Tax laws can differ based on various factors, including your specific location, income level, and unique financial situation. For tax advice tailored to your needs, connect with a KBF professional here.