3 Home Renovations That Can Provide Tax Deductions
By Kara Parlin
As a homeowner, your property can often be your most significant expense. At tax time, though, that investment can pay off by providing opportunities to deduct property taxes and mortgage interest if you itemize your tax deductions. But that’s not all. You can potentially reduce your tax burden through home renovations. Whether your projects are for aesthetics, energy efficiency or accessibility, several improvements can help reduce your taxes.
1. Rehabilitating Historic Properties
If you own or are looking to acquire a historic building, you may qualify for tax credits on renovations. Prior to the Tax Cuts and Job Act (TCJA) that Congress introduced at the end of 2017, there were two ways property owners could claim credits. After it became law, there were several major changes:
- The rehabilitation credit that previously allowed you to recoup 10 percent of qualifying expenses for buildings ‘placed in service’ before 1939 has been eliminated and is no longer available under the TCJA.
- The historic structures credit, however, is still available but is structured differently. In the past, you could take the 20 percent credit in a single year. Now, that 20 percent is split over five years, making your yearly credit 4 percent.
2. Renovations for Medical Purposes
In some cases, home renovation projects are less about updating styles and more focused on improved function and accessibility. These modifications may be as minor as installing handrails and changing cabinet hardware, to more complex projects like adding an elevator or remodeling a bathroom.
Since there are different requirements and implications depending on the project, you’ll want to talk to your accountant or another tax professional who is knowledgeable about recent tax law changes for an accurate impact estimate. According to Nolo, here are a few guidelines to keep in mind:
- The main purpose for the improvement must be to provide medical care.
- If the renovations increase your home’s value, you must reduce your tax deduction by the amount of the increased value.
- In some cases, you may need a doctor to prescribe the modification to be able to claim it as a deduction.
3. Improvements for Energy Efficiency
You probably already know that “smart” home systems and Energy Star-rated appliances can help save on your yearly utility bill. But did you know you can install an energy generating system on your property that can earn you tax credits?
The Residential Renewable Energy Tax Credit helps you save during tax time if you install a geothermal heat pump, fuel cell or small wind device. The credit percentage varies based on the type of system. Plus, some of these credit opportunities expire in the coming years, so you’ll want to research which options will fit your situation best. But the credit combined with the savings on your energy bills can definitely add up.
While tax codes change from one year to the next, there are usually several ways you can capitalize on your home renovations to claim tax deductions. Learn more about how Emprove can empower you with your home design projects.