Tax deductions

Home Renovations and Tax Deductions: CPA Tax Tips

This is a frequently asked question, “Are my home renovations tax deductible? “For most people, when you renovate your home, it’s a personal expense.” according to Jeffrey Levine, CPA and tax expert at Buckingham Strategic Wealth, “and therefore it will not be deductible.”.

“Every situation is different and that’s why our tax system is so difficult because it’s all about facts and circumstances,” says Levine. Here are some examples of home improvements that may have tax benefits.

Recommended: Home improvements and your taxes

What are some improvements with tax benefits?

  1. An elevator has been installed because there is a medical need
  2. Solar panels or other energy-efficient upgrades
  3. A home office that qualifies as a business deduction

There are also “expenses that can help lower your taxes in the year you sell your home,” according to our partners at TurboTax. These expenditures are called capital improvements.

What are capital improvements?

A capital improvement occurs when there is a significant change in your property. This change or modification is necessary to meet the following criteria:

  1. The improvement or alteration must add significant value to the property. It could also significantly extend the life of a property.
  2. The buff is permanent and would cause damage if removed.
  3. The intent is to make this improvement or modification permanent.

The website says to keep receipts or other evidence of improvements and there is a chart to record and track any of your improvements or changes.

Recommended: Maintain good tax records

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Read further for the lengthy conversation between Robert Powell and Levine of the Retirement Daily.

Video Transcript | Jeffrey Levine, CPA and tax specialist, Buckingham Strategic Wealth

Robert Powell: Welcome to TheStreet Tax Advice with Jeffrey Levine of Buckingham Wealth Partners. So during Covid many people were upgrading their homes, is there some sort of tax planning opportunity for those home improvements?

Jeffrey Levin: You know, for most people, when you do renovations, it’s a personal expense and therefore it won’t be deductible. Now, of course, every situation is different and that’s why our tax system is so difficult because it’s all about facts and circumstances.

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Which medical expenses benefit from tax advantages?

For example, most people if you installed an elevator in your home would be fine, but you don’t need it. But if you, say, we’re in a situation where you were dependent, disabled, and needed that lift as a medical expense. Well, as far as the elevator, the money you spend on that elevator does not improve the overall value of your property.

So, for example, let’s say your house is worth $500,000, you spend $50,000 to install an elevator, and an appraiser comes back afterwards and says $510,000. In other words, your $50,000 expense increased your property value by $10,000, but most people don’t really appreciate a lift, so that doesn’t give it the full 50. Well , that $40,000 becomes a medical expense that could potentially be deductible on your return if that, along with your other medical expenses, exceeds seven and a half percent of your AGI.

Which energy retrofits have tax benefits?

There are other things you do that may not be deductible but still provide a tax benefit. For example, energy-efficient upgrades, if you install solar panels on your roof or replace your windows or doors with more energy-efficient options, can create credits for you.

And then, finally, if you’re using your house for, say, a home office, well, that’s not really a deduction for improvements to your house. It’s a business deduction for your office for your business. But, of course, it could also be part of your home. So basically, not really direct inferences, but there are sort of these satellites in orbit, inferences that may apply based on a specific set of facts and circumstances.

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Are there any tax benefits when selling my home?

Robert Powell: So I can’t help myself, I have to ask for a follow-up. In many cases, would some of these upgrades add to the base of your home when you go to sell it?

Jeffrey Levin: Of course, yes, if you spend money on an upgrade. It’s not like we deduct or depreciate it over time if you don’t rent it. So yes, it would increase the cost of your property. Presumably, when you go to sell it, it would have a lower tax bill. Of course, today for primary residents, very few individuals still, even after the recent boom in the real estate market, very few individuals end up paying income tax anyway when selling their home.

Jeffrey Levin: Because if you are single, you can have $250,000 on top of your cost, which is non-taxable and a gain. And if you’re a married couple and you’ve lived there, again, that’s usually you know, you have to do it in both situations, you have to have lived two out of five years there and be House owner. But provided you have that for married couples, that $250,000 becomes $500,000. So a married couple who bought a house for $500,000 10 years ago and invested $100,000 in a new roof and kitchen in the last year is at $600,000. They could sell the house for $1.1 million today and walk away tax-free.

IRS Topic 701 explains that the last two out of five years rule should be counted “before its sale date.” TurboTax CPA and tax expert Miguel Burgos adds, “This aspect of the 2/5 rule is key to getting an accurate tax result.

Jeffrey Levin: And actually, Bob, chances are they could sell it for more, because expenses like commissions and other expenses can add up to that before you even get there. So most people don’t have a tax bill when they sell their house, but you never know, and if you live there long enough and the price appreciates enough, that would be a big deal to have.

Robert Powell: Jeffrey, thank you for this tax advice, and we know we have more in store for our viewers in the weeks and months to come.

Jeffrey Levin: Well, I can’t wait to be there and join you and answer more questions from readers.

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Editor’s note: The opinions expressed in this article are those of the authors. The content was rReviewed for tax accuracy by a TurboTax CPA expert.

Zachary Faulds contributed writing to this article and produced and edited this video.