It’s April 15th and one more tax deadline has passed. Regardless of whether you paid or you received a refund, you probably wish you could have done a bit better. Like every year, I assume, you vow that this year, you will take advantage of all the tax deductions available to you. Perhaps an overlooked tax deduction is right at your feet.
Home improvements are some of the most common and the most accessible deductions. Some, like major repairs, can be deducted in the same tax year. Others, like hardwood flooring, might not earn you a same-year deduction, but it will make your home more enjoyable while you are living there and come time to sell, your flooring could perform double duty by increasing the sale price and lowering your ultimate tax bill.
Naturally, if you are making home improvements for tax benefits, consult with your tax professional, but if you expect to have at least $250,000 in equity in your home ($500,000 if you file jointly), it’s a good idea to start hedging against a big capital improvement tax bill if you do decide to sell.
The IRS has very specific definitions for home improvements. It must actually be an improvement. In other words, if your home has carpet and you replace the carpet, it probably won’t be covered. If you paint your home, repair your roof or water heater, it will likely be considered a repair and you might be able to write it off for the same tax year. However, if you add to the value of the home with added rooms, a remodeled kitchen or bath, fencing, a deck, a security system, central air or you got it, flooring, it is considered an improvement to the home and you may be able to claim it against your capital gains. Here is a more detailed list of acceptable improvements.
If you are looking to sell your home in this year, you might want to calculate your equity – keeping in mind that Bay Area properties are currently hot and you might end up selling for more than your listing price – and see what improvements could keep you from having a big capital gains tax after your sale. Depending on your tax bracket, the capital gains tax could be anywhere from 15-20% of the profit above the capital gains threshold. In other words, if you sell your home for $300,000 in profit, and you file single, you could owe between $7,500 and $10,000 to the IRS. You might want to ask your real estate broker, but a new floor might end up saving a lot of money.
If you aren’t looking to sell your home this year, it’s a good idea to space out home improvements, instead of having to do everything right before you sell. Granite countertops, stainless steel appliances, new kitchen and bathroom fixtures and hardwood floors are some of the easiest and most cost effective ways of increasing your home’s value while potentially decreasing your tax liability once you do sell.