Hoping to deduct last year’s home renovations? You do have options.
Q: Can I deduct remodeling expenses on my taxes?
A: Tax Day is April 17. If you’ve recently remodeled your home or are thinking about renovating in the future, you may be wondering if there is a way to deduct a remodel. After all, you’re looking at a big investment, and it sure would be nice to lower your tax liability to soften the blow.
While you can’t simply deduct the whole thing, there are deductions you should explore.
It should go without saying, but the following info is generalized. Please consult your CPA or another tax expert about your unique situation before taking any action based on what you read here.
One option would be to deduct the sales tax that you paid on your remodel. This is an easy one and can be a big win for homeowners who remodel, especially on major high-dollar renovations, such as kitchens, additions and whole houses.
Seattle’s sales tax rate of around 10 percent is one of the highest in the nation, and it pays to deduct the state and local taxes you paid on your home renovation on your federal tax return. Ask your remodeler for a summary of sales taxes they collected on your behalf throughout the year. One thing to note is that you do not have to pay sales tax in Washington state on services, such as design.
If you are a person with a handicap or disability, or if you have a handicapped family member living in your home, you may be able to claim a significant deduction on your federal taxes for medically necessary home improvements. Here are a few examples, courtesy of the IRS, of items you might be able to deduct:
- Building wheelchair ramps
- Widening hallways and doorways
- Lowering kitchen cabinets
- Installing lifts
- Modifying smoke detectors
- Modifying stairs
- Adding handrails or grab bars
- Modifying hardware on doors
Another option is to deduct the interest paid on a home-renovation loan or line of credit. The mortgage interest deduction is one of the most popular itemized deductions Americans utilize. It allows homeowners not only to deduct the interest they pay on the mortgage of their primary and second homes, but it also allows the deduction of interest on loans secured by your residences, including home-renovation loans and home-equity lines of credit (HELOCs).
With the passage of the Tax Cuts and Jobs Act of 2017 in December, the fate of HELOC tax deductions became uncertain. While the interest deduction is indeed suspended until 2026, there is one substantial loophole: you can still deduct if you use borrowed HELOC funds to “buy, build or substantially improve” the home.
While many of the deductions for energy-efficiency home improvements (such as new insulation) expired in 2013, the solar tax credit was recently renewed. It gives you a whopping 30 percent federal tax credit for the installation of a new photovoltaic or solar hot water system, including the cost of installation. A tax credit is better than a deduction because it allows you to directly write off that amount from the federal taxes you owe. The 30 percent gradually steps down to 22 percent over the course of the next few years.
Some of the biggest tax advantages to be had from a home renovation may come years after you complete your remodel. When you sell your home, the IRS will look at the amount you originally paid (your home’s cost basis) and subtract that from the selling price, which is the profit on which you may have to pay capital gains tax. Any qualifying improvements will be subtracted from that amount.
To qualify, a capital improvement must add to the value of your home, prolong its life or adapt it to new uses. A major remodel or addition counts, especially if you are adding new space, a new HVAC system (but not just an upgrade of an existing system) or a new roof. Things like replacing your existing cabinets with new cabinets or replacing a water heater probably won’t count.
Denny Conner is the president of CRD Design Build and a member of the Master Builders Association of King and Snohomish Counties (MBAKS), and HomeWork is the group’s weekly column. If you have a home improvement, remodeling or residential homebuilding question you’d like answered by one of the MBAKS’s nearly 3,000 members, write to email@example.com.