It's that time of year again – time to settle up with Uncle Sam and file taxes – and many people wonder if any of the costs involved with the various home remodeling or improvement projects they made – whether on their own or by home remodeling contractors, during the year can be deducted from their taxes. The answer to that question may not come as easily as one may hope.
The simplest way to answer the question: maybe. There are indeed certain situations and scenarios that will allow the homeowner to deduct at least some of the cost of home remodeling projects. The most common of these are as follows:
- If the home remodeling project was undertaken for medical reasons
- If the home remoedling project involved energy efficient upgrades of certain household functions.
- If you used a home equity loam or line of credit to pay for the projects.
Not that it is cut and dry though. The IRS has its own ideas about how home remodeling projects are classified and understanding a little about what those are can help determine if your remodeling project is tax deductible or not.
As far as the IRS is concerned, home repair projects are not tax deductible; having to repair things around the house is simply something that comes with owning a home. The exception to this can be if you are replacing older elements of your home with something more energy efficient – replacement windows for example, or swapping out an old boiler.
To further complicate matters some home improvements will net you a tax deduction, while others earn you a tax credit. What is the difference? A $1,000 tax deduction lowers your actual taxable income while a tax credit allows you to deduct the amount spent on your home improvement from anything you might owe Uncle Sam. Here is an example:
If you earn $35,000 a year and can claim a $1,000 tax deduction, that means your taxable income is reduced to $34,000. If, on the other hand, you can claim a tax credit in the same amount then you are still taxed on the full $35,000 but can claim the $1,000 back off anything you owe the government. This means if you are already getting a tax refund, it will be larger.
Now let’s look at some specific home remodeling scenarios that may score you money back at tax time.
Remodeling for Medical Reasons
Claiming home remodeling projects done performed to improve the life of an ill or disabled person in your home is a possibility, but usually only if you can have a doctor certify in writing that the project was indeed undertaken for that reason.
Those who use a wheelchair can often claim the most as remodeling projects like bathroom and kitchen renovations to improve accessibility are usually eligible for tax deductions. In addition, a person with asthma may be able to deduct the cost of new central air conditioning or air filtration system whilst a person undergoing rehab at home may even be able to deduct the cost of work performed by a remodeling contractor for a therapeutic pool or hot tub.
If you think your recent remodeling project may qualify you can refer to IRS Publication 502 for more details.
Remodeling for Energy Efficiency
Over the last few years the government has offered a number of tax credits and tax deductions for energy efficient home improvements and many of them are still available to be claimed on homeowners’ 2010 tax returns. In fact, these energy efficiency related tax breaks change all the time and can be hard to keep track of, so the best person to advise you about your particular situation is a CPA. However here are some commonly claimed energy efficient home improvement projects:
- Replacement windows and doors that will improve energy efficiency
- Upgrading or adding insulation
- Upgrading your roof to one that is metal or asphalt
- Installing a more efficient air conditioning system
- Installing a solar water heater
- The purchase of a biomass stove
Remodeling using a Home Equity Loam or Line of Credit
Taking out a home equity loan or line of credit is a popular way to pay for larger home remodeling projects and at least some of the interest you pay on that loan may be tax deductible in the same way as the interest on a standard mortgage is.
As you can see, there are indeed ways to claim back at least some of your home remodeling expenditures but, before you consider doing so, make sure that you have all the necessary receipts and proofs to back up anything you claim. From the time you received a home remodeling cost estimate, to the time of project completion, it’s best to keep track. You don't have to submit them with your return of course but in the event of an audit they can prove invaluable.