The Tax Implications of Home Renovations


In the United States, some "qualified" home improvements can reduce your tax grab when it's time to sell your home and some could allow you to avail of an immediate tax credit, but some of these improvements could also increase your property tax bill by triggering a reassessment of the value of your property.

Fortunately, a property tax increase caused by a home improvement is usually offset by your increase in equity, a higher resale value and a possible reduction in taxes – not to mention your appreciation of improvements.

Capital Improvements

Capital improvements are those that can greatly help lower your taxes.

Eligible improvements are improvements that increase the overall value of your home or extend the life of the structure. This includes: insulation, new heating and / or cooling systems, a fence, driveway, the addition of a garage or carport, the addition of a new room, a swimming pool, a landscaping, a porch or a terrace

Repairs, l & # 39; maintenance and upkeep are generally not considered capital improvements. These include such things as: plastering, painting, wallpaper, replacing broken or cracked tiles, repairing minor leaks, patching your roof, repairing broken windows, and so on.

The moral of history is; Whenever possible, replace rather than repair capital improvements, which increases the owner's base cost and may reduce taxes.

(For more information on what is considered a capital improvement, see United States Internal Revenue Service Publication 523 entitled "Selling Your Home" and the correction of the publication. "1221.")

Your Cost

The cost base of your house is used in the calculation to calculate your capital gains tax. It's not as simple as subtracting the purchase price from the purchase price.

You start with the original purchase price, add your closing costs, add title insurance fees and / or legal services, and so on. The costs of acquiring loans can not be included. Then add the cost of "qualified" home improvements.

Any insurance received for theft, damage caused by the storm and other losses suffered would have been subtracted, and the costs of reconstruction or replacement would have been added. You must also subtract any deferred gain from houses owned by previous owners and subtract the allowable depreciation for any portion of the property that has been used and claimed for commercial purposes. Net income is your new or adjusted cost base.

To determine taxes, subtract the adjusted cost base from the sale price, as well as the selling expenses (real estate contracts, legal fees, etc.).

Provided they are completed within 90 days of your sale and provided they have been completed to make the house more salable, repairs (eg tapestry, painting, planting flowers , maintenance, etc.) can also be classified as selling costs. So, from a tax point of view, it's a good time to perform these repairs.

The difference between the adjusted cost base and the sale price is your capital gain, of which $ 250,000 ($ 500,000 for co-applicants) is currently excluded from taxes.

Tax Credits for Residential Energy Retrofits

Consumers who buy and install particular home products, such as energy efficient windows, roofs, insulation, doors and heaters and cooling As of January 2006, the tax credit can reach $ 500.

The law providing for these credits, called EPACT, also provides for a credit equivalent to 30% of eligible expenditures for the purchase of qualified photovoltaic properties and for solar water heating properties. used exclusively for purposes other than heating swimming pools and hot tubs. The maximum credit is $ 2,000.

Improvements must be installed in or on the taxpayer's principal residence in the United States. Home Renovation Tax Credits apply to improvements made between January 1, 2006 and December 31, 2007. Recently, an invoice has been submitted to extend this program.

As always, check with your accountant to see how these regulations and new changes in the code may affect you.


Source by Shawn Meldrum

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