Hi Kathy:
My husband and I have been thinking about remodeling our home instead of selling and moving to a newer home. We have many memories here and we feel that will it improve our home’s value and at the same time preserve our wonderful memories. As tax time approaches, can we write off the cost of the remodel?
—John M.
Hi John:
What a great question as many of us are uncertain about this pause in the real estate market. Updating your home will typically always provide value, depending on what you do and/or how much you spend on your project.
If you use your home primarily as a personal residence, tax laws do not allow you to deduct the cost of the home improvement. They would be considered nondeductible personal expenses.
What you need to do is keep track of all the expenses that you do for your home improvements while you are living there and when it is time to sell your home, you may be able to reduce your taxes in the year that your home sells.
Remodeling breaks down into two categories for taxes: the cost of home improvements versus the cost of repairs. You will want to add the cost of your home improvements to your tax basis.
Your tax basis is the amount that you subtract from your sales price to determine your profits.
If your remodel adds value to your home, like a new roof, a new alarm system, new windows, a new addition, and certain energy-saving improvements, this amount will go into the sales price and now be an adjusted basis. If you make a profit, it is that gain that may be taxable.
Generally, that gain can be up to $250,000 for a single tax filer or $500,000 for a couple filing jointly. The goal is to reduce or avoid paying taxes when you sell your home.
Also, if a portion of your home is used for business you may be able to write off a portion of your home as part of the adjusted basis through depreciation. In addition, the cost of repairs for that portion of the home may be currently deductible. Another thing to remember is if your area has gone way up or you have lived in your home for years and you have a great gain when you sell, you can reduce the taxable gain by including the improvements in the cost basis.
Taxes can be confusing, but we all want to save money. I always recommend speaking with a professional tax consultant or CPA. I would also keep all my receipts in a folder under home improvements and note each item. Good record keeping, which can be annoying, can also potentially save you money in the end. Here’s to your new remodel!
—Kathy McSherry is a Realtor at Compass. Email your questions to Kathy.mcsherry@compass.com or call 702-328-9905.
