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The best home improvements that can earn you a tax break

Posted on Monday, February 27, 2017 at 3:35:31 PM

Home improvements aren't just a way to invest in the long-term value of your home and build equity - they can actually save you money in the short-term as well. If you spent money on home improvements in the last year, chances are at least a few of these project could earn you a tax break in the form of deductions and rebates. 

According to the tax experts at TurboTax, home improvement projects are not typically considered a deductible expense from federal taxes. Yet, through a variety of different programs and government initiatives, there may be ways to minimize the taxes you pay via home improvement projects. Here are some of the most common ways homeowners can save:

Using your mortgage to make improvements
The interest on your mortgage payments is almost always tax deductible. This means that - if you know you are buying a "fixer-upper" property - if you roll the cost of the renovation or remodel into the amount your lender approves as a mortgage, you can deduct the interest on your home improvement payments from your income in your taxes. 

Home improvement loans
Similar to a mortgage, the interest on home improvement loans is also often tax-deductible up to $100,000, according to the IRS. This can make a serious dent in the overall cost of a home improvement project. 

Improvements as itemized medical expenses
Sometimes a home improvement project isn't just about upping the value of a home or making it more aesthetically pleasing. Homeowners facing medical challenges - including mobility issues or other forms of disabilities - may be able to itemize and deduct the cost of home improvements that are medically necessary. These projects may include installing entrance or exit ramps, modifying bathrooms for accessibility and safety, widening doors and hallways and adding handrails. Just be sure to only claim the expenses that do not explicitly raise the value of a home.

One of the areas the federal government is keen on promoting is energy-efficiency upgrades. According to MarketWatch, making your home "greener" can earn you a variety of tax credits, including:

  • Biomass stoves: About $300 credit for units with an Energy Star thermal efficiency rating of 75 percent or more.
  • Air source heat pumps: $300 credit.
  • Central air conditioning: $300 credit.
  • Fossil fuel boilers: $150 credit.
  • Insulation: Up to $500 or 10 percent of the cost, whichever is lower.
  • Roofs: 10 percent of the cost up to $500.
  • Non-solar water heaters: $300 credit.
  • Solar water heaters: 30 percent of the equipment and installation costs with no cap on amount.
  • Windows, doors, and skylights: 10 percent of the cost up to $200 for windows and skylights; up to $500 for doors.
  • Geothermal heat pumps: Up to 30 percent of equipment and installation costs.
  • Small residential wind turbines: 30 percent credit.
  • Residential fuel cells: 30 percent of the equipment and installation costs with no cap.

Solar in particular is associated with a variety of state and federal tax deductions, making it a popular home improvement upgrade for many homeowners. Energy-efficiency tax credits must be taken in the year that the item was installed and began functioning.

Improving a home office
Those who work from home may already know about the fact they can deduct costs associated with their business from their reported income. This extends all the way to home improvements that directly impact the areas of their home they use for business. According to Nolo, you can deduct 100 percent of the cost of improvements you make just to your home office. This could include the construction of bookshelves, redoing a heating and air conditioning system or installing a high-speed internet connection. If these improvements are benefit the entire home - i.e. not just the office - you can deduct their value according to how much of the home you use for your business. For example, if your home office comprises 20 percent of your home's footprint, you could deduct 20 percent of the value of home improvements. 

With any tax deduction or rebate, it is wise to discuss it in advance with a tax professional. For any questions regarding home improvement projects, speak to a representative from your local bank about the home improvement loan options available today, as well as which one will best-suit your funding needs.