The housing boom increased in 2021 for a number of reasons, including the ongoing pandemic and an increasing number of people working from home. Spending and remodeling are expected to remain strong in 2022, with signs things could slow down by the end of the year, according to Harvard’s Leading Indicator of Remodeling Activity (LIRA).
But not all home improvement jobs are treated equally by the IRS.
Literature Recommendations: TurboTax advice on tax-deductible home improvement work
“For most people, home improvement is a personal expense and therefore not tax deductible,” says Jeffrey Levine, Chartered Accountant and Tax Specialist at Buckingham Strategic Wealth. But there are some exceptions.
So before you get some paint at Home Depot (HD) or maybe some plants at Loews ( (L) – Get the Loews Corporation report), watch the video above with Robert Powell of Levine and Retirement Daily for tax tips and home improvement deductions and credits.
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Quotes| What are some tax-deductible home improvement jobs?
Jeffrey Levine, Chief Planning Officer, Buckingham Strategic Wealth
Jeffrey Levine, Chief Planning Officer, Buckingham Strategic Wealth
Video Transcript:
Robert Powell: Welcome to TheStreet’s tax tips with Jeffrey Levine of Buckingham Wealth Partners. So during Covid many people have been renovating their homes, are there any tax planning options for these home improvements?
Jeffrey Levin: You know, for most people, when you do home improvement, it’s a personal expense, so it’s not deductible. Now, of course, every situation is different and that’s why our tax system is so challenging, because it’s all about facts and circumstances.
For example, if you were to add an elevator to your home, that would be a nice touch, but you don’t need it. But if you, say, we’re in a position where you’ve been dependent, you’ve been disabled, and you needed that lift as a medical expense. Well, to the extent that the elevator is there, the money you spend on that elevator won’t improve the overall value of your property.
For example, let’s say your house is worth $500,000, you spend $50,000 to put in an elevator, and then an appraiser comes back and says $510,000. In other words, your $50,000 in expenses added $10,000 to your property value, but most people don’t really appreciate an elevator, so don’t give it the full 50. Well, that $40,000 will medical expenses that could potentially be deducted on your return if, together with your other medical expenses, they exceed seven and a half percent of your AGI.
There are other things you do that may not be deductible but still provide a tax benefit. For example, energy efficient improvements such as adding solar panels to your roof or replacing your windows or doors with more energy efficient options can create credits for you.
Finally, if you use your home for a home office, for example, then that’s not really a deduction for the improvements to your home. It’s a business print for your office for your company. But of course that could also be a part of your house. So basically not really direct deductions, but somehow there are these deductions that are orbiting satellites that can apply depending on certain facts and circumstances.
Robert Powell: So I can’t help myself, I have to ask for a follow up. In many cases, would some of these improvements increase the base of your home if you sell it?
Jeffrey Levin: Of course yes, if you spend money on an improvement. It’s not like we deduct this or amortize it over time if you don’t rent it. So yes, that would increase the cost of your property. If you sell it, it would probably have a lower tax bill. Of course, very few people pay for first-time residents today, and even after the recent real estate bull run, very few people pay income tax on the sale of their home anyway.
Because if you’re single, you can have $250,000 on top of your expenses, which is tax-free and profitable. And if you are a married couple and have lived there, you usually know that in both situations you have to live there and own the house for two years out of five. But assuming you have that for married couples, $250,000 becomes $500,000. So a couple that bought a $500,000 house 10 years ago and spent $100,000 on a new roof and kitchen last year is $600,000. You could sell the house today for $1.1 million and walk away with no taxes.
And actually, Bob, chances are they could sell it for more than that because things like expenses, like commissions and other expenses can add up before you even get there. So most people don’t have a tax bill when they sell their house, but you never know, and if you live there long enough and the price goes up high enough, that would be a big problem.
Robert Powell: Jeffrey, thanks for these tax tips and we know we have more in store for our viewers in the weeks and months to come.
Jeffrey Levin: Well, I look forward to it and to joining you in answering a few more reader questions.
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