When you do home improvements on your primary residence, you cannot write them off as tax deductions in the year the work was done. However, you should still keep those home improvement receipts because the investment you made in your home will still offer a tax break when it comes time for you to sell.
What Types Of Home Improvements Qualify?
Any home improvement you make is considered a personal expense and not deductible in the year the work was done. But as you do projects such as remodeling the bathroom, updating the kitchen or putting on a new roof, you should keep all of your receipts because that money will help save you on taxes when the time comes for you to sell that home and move on.
Profit On The Sale
When you sell your home for a profit, that profit is taxable income. For example, if you bought your home for $50,000 20 years ago and sold it for $125,000 today, then you would have taxable income of $75,000. While it is great to make a profit when you sell your home, the taxes you would have to pay could take a big chunk out of the money you make. The $50,000 you used to purchase your home establishes its base value for the tax transaction. This initial investment is known as the basis, and you can alter that basis with your home improvement receipts.
Counting The Improvements
You have been a smart homeowner for 20 years and have kept all of the receipts you have relevant to the improvements made on your home. You made a note on each receipt explaining what work was done, and you have kept all projects grouped together. When you add it all up, you get $20,000 worth of qualified improvements you have made to your home since you have owned it. You can use that information to change the basis and lower your taxes.
Lowering The Taxes
When you calculate how much your basis is to get your final tax number, you add together your initial investment and your home improvement expenses. In our example, this changes the basis from $50,000 to $70,000. When we do the math, the taxable profit on the transaction drops from $75,000 to $55,000.
Don’t Be Afraid To Remodel
Even though you cannot write off your remodeling expenses in the year you do the work, all of that remodeling is still going to benefit you in the long run. If you get ideas to remodel your home, you should pursue them and remember to keep every receipt associated with every project.
When you remodel your home, you add to its value. That is why the money you invest on remodeling your home can be added to your initial investment to get a true picture of what the home is worth. Be sure to keep comprehensive files of all of your remodeling projects and be prepared to deduct those improvements when the time comes for you to sell your home.