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As a homeowner you probably have a never-ending list of things you’d like to do to your home.  Maybe you want to add a pool to your backyard, update the bathroom or design the ultimate man cave in your basement.  While you’re racking up all these expenses, you’re likely to wonder if any of them are tax deductible and we have the answer.

Energy-efficient upgrades

Taxpayers who make energy efficient upgrades to their home can qualify for the Residential Energy Efficient Property Credit.  Eligible equipment includes solar panels, solar-powered water heaters, small wind turbines, geothermal heat pumps, and fuel cells.  The credit is worth 30% of the cost including labor and installation.  However, the maximum you can receive for fuel cells is $500 for each half-kilowatt of power capacity.

Medically necessary home improvements

Living with a disability or chronic illness can be challenging.  Things you take for granted such as reaching into a kitchen cabinet can be nearly impossible for those suffering.  If your medical condition requires you to install special equipment or make certain home improvements, you may be able to deduct the medical expenses. Any improvements that increase the value of your home must be excluded. The IRS has a long list of fully deductible expenses which includes:

  • Building entrance or exit ramps
  • Expanding doorways at entrances or exits
  • Widening or customizing hallways and interior doorways
  • Installing railings and support bars to bathrooms
  • Lowering or adjusting kitchen cabinets and equipment
  • Relocating or modifying electrical outlets and fixtures
  • Setting up porch lifts and other forms of lifts (Elevators typically add value so your deduction may be limited)
  • Adjusting fire alarms, smoke detectors, and other warning systems
  • Making modifications to the stairs
  • Placing handrails or grab bars in any part of the house
  • Changing the hardware on doors
  • Reworking spaces in front of entrance and exit doors
  • Leveling the ground to improve the home’s accessibility

Remember, you can only claim the deduction if you itemize. Additionally, your expenses must exceed 7.5% of your adjusted gross income. ezTaxReturn.com supports itemized deductions and is the easiest way to do your taxes. Pre-register now and receive a special discount next year.

Save money when you sell your home

Unfortunately, most of the projects on your to-do list won’t be tax deductible.  Hold on to those receipts though because your improvements can reduce your taxes when you sell your home.  Right now, the capital gains exclusion lets home sellers walk away with $250,000 of profits tax-free.  Double the amount if you’re a joint filer.  All the IRS requires is that you’ve lived in the home for two of the last five years. 

To calculate your profit, take everything you paid for the house (original purchase price, closing costs, etc.) and add the cost of your improvements.  This will give you your adjusted basis.  Next, subtract the adjusted basis from whatever price you sold the home for to get your profit.  Anything above the exclusion amount is taxable.

If you’re looking to increase your home’s value, here are some projects that can help.

  • Additions – Bedroom, bathroom, deck, garage, porch, patio
  • Lawn & grounds – Landscaping, driveway, walkway, fence, retaining wall, swimming pool
  • Exterior – Storms windows/doors, new roof, new siding
  • Systems – Central air conditioning, heating system, furnace, duct work, air/water filtration systems, lawn sprinkler systems, security systems
  • Plumbing – Septic system, water heater, filtration system
  • Interior – Flooring, fireplace, kitchen modernization, wall-to-wall carpeting

Please note, there’s no tax break for repairing items in your home.  Replacing broken windowpanes, fixing leaks and repainting walls are just a part of being a homeowner.