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Tax Deductible Home Improvements for 2016

As a homeowner you might be asking yourself if there are any tax breaks for all the money you spent improving your home. The answer could be yes or no. Either way, you will need to track your expenses for any home improvement.

Once you make a home improvement, like putting in central air conditioning, installing a sun-room or upgrading the roof, you are not able to deduct the expense during the year you spent the funds. You should maintain a record of those costs; they might help you to lower your taxes when you sell your home.

Improvements Vs RepairsHome Improvement Tax Deductions

Funds you might spend on your house fall into 2 groups, tax wise: the expense of improvements versus the expense of repairs.

You include the expense of capital improvements to your tax basis of the property. Your tax basis is the sum of money you will subtract from the sales price to establish your profit. A capital improvement is anything that increases worth to your property, prolongs its lifespan or configures it to different uses.

While there is no specific list of what qualifies, you can be sure to add the costs of improvements to the house like a new roof, a swimming pool or a new central air-conditioning system. The improvements don’t have to be high priced items, adding things like storm windows, extra water heater, security system and intercom also count. (There are some energy-saving improvements that you can claim when you make them).

However, the expense of repairs cannot be included in your basis. Replacing a window, painting a room or fixing a gutter is considered repairs not improvements.

Keeping Track Less Crucial than Before

Previously, it had been essential for property owners to hold on to invoices for everything that might be eligible as an improvement. Every single cent included was a cent less that the IRS could potentially tax once the house was sold.

But these days the home-sale profits are tax-free for the majority of homeowners, there’s no certainty that diligently keeping track of your basis is going to pay off.

Save Once You Sell

Under existing regulations, the initial $250,000 of profit on the selling price of your principal dwelling is tax-free ($500,000 for married couples who submit joint tax returns) once you have owned and resided in your house for a minimum of 2 of the 5 years leading up to the sale.

After this regulation was made law, many experts assumed it meant property owners did not have to keep track of their basis. All things considered, what are the chances that anyone would record a quarter of a million dollar profit (or a very nice half a million) on their house?

But that big of an exemption is probably not sufficient to protect the gain in a property that you’ve actually owned a long period of time. Therefore maintaining meticulous records is still a good habit.

To figure out the amount of profit once you sell, you take into account whatever you paid for the residence, the initial purchase price, charges etc., and add to this the expense of any improvements you made over time to arrive at an overall sum, that is called the “adjusted basis.”

(If you sold a property before August 5, 1997 and benefited from the old law that allow the property seller delay the tax on their profit by “rolling” the gain over into a new house, your adjusted basis is decreased by the sum of any rolled-over cash gain.)

Look at the adjusted basis with the final sales price you receive for the property. If you’ve produced a profit, that increase could be taxable (usually only when the profit exceeds $250,000 for an individual or $500,000 for a husband and wife submitting together). On the other hand, deficits on sales of private dwellings are not tax deductible.

It becomes clear it would be wise to maintain a record of everything you invest to update, improve or maintain your property, in order to reduce or avoid income taxes once you sell.

Getting Ready

Prepare a unique file to keep all invoices and details for all upgrades that you make to your property.

If you’ve resided in your home for several years, and neighborhood property values have been steadily increasing over those years, a part of your profit when you sell might be taxable. In that case, it is possible to decrease the taxable gain by adding the upgrades in the cost basis of the property.

In the event you operate an enterprise at home or lease part of your house to someone else, you might be qualified to discount a part of your home’s adjusted basis via depreciation. In the event you so, whenever you sell the property you can’t leave out the sum of depreciation you took under the $250,000/$500,000 profit exclusion break. Additionally, the price of repairs to that area of your house could be currently tax deductible.

Remember, when you file your taxes with TurboTax, you don’t need to know which schedules to fill out. We’ll ask you simple questions about your life and put your answers on all the appropriate forms.


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