6 Things To Know About Home Tax Deductions
Home ownership offers some really valuable financial benefits, particularly when it comes to taxes. But understanding how they work (and when they kick in) is key to maximizing their value. Read on for the six things you'll want to keep in mind come April 15.
Tax benefits do not always equal tax deductions or tax credits.
1. Let’s review the basics. Your total annual income is your taxable income and based on that number, you will fall into a certain “tax bracket.” Your tax bracket determines your tax liability (a.k.a your tax bill). Tax credits directly reduce your tax bill (which is why they are better); tax deductions on the other hand bring down your taxable income. The most common tax credits are related to first time home buyer, expenses related to child care and home offices.
2. Tax deductions on the other hand lower your taxable income to an amount equal to your marginal tax bracket. For example, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).
Let’s better understand home improvement tax benefits.
3. First, the bad news: Home improvements to your primary place of residence are not “deductible,” though they do offer tax value when you sell your home. When you sell your home and make a profit - and we hope you do - the IRS will tax the difference between what you paid, known as the basis, and the sale price or the “profit.”
4. When you make home improvements, it increases your “basis,” and essentially reduces the amount of taxes you pay on the profit. If you bought your home for $100,000 (“basis”), for instance, and you made $50,000 worth of home improvements then sell it for $250,000, you pay taxes on $100,00 (“profit”).
Before making any home improvements, however, make sure the improvement “substantially adds value to your home.” That generally includes additional rooms, new bathrooms, kitchen upgrades, fencing, walkways, plumbing, roofing, etc.
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Get familiar with the workarounds.
5. Now the good news. As you already know, most property taxes are tax-deductible, but so is the interest on a home improvement loan or home equity line of credit. The interest can be fully deductible up to $100,000. While the amount of the deduction will depend on the amount of the loan and your tax bracket, this offers a way to get that home looking amazing, get a year-end tax deduction and increase your home basis!
6. If you use any part of your home as a home office - and you have a legitimate business - or you rent out a room in your home or Airbnb a room, then you can depreciate 100% of any “home improvements” made to that specific area of your home. If you make a general home improvement, then you may depreciate a portion equivalent to the percentage of your home used for the business.
Are there other home improvement tax deductions? Yes, there are number of them related to specific circumstances. Check out Ramona’s Tax series on My Money My Future for the scoop on those and more.
Ramona Ortega, Esq. is the founder and #LadyBoss at My Money My Future, a personal finance web platform empowering millennials to make smarter money decisions.
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