Tax season is once again in full swing. If you’ve recently renovated the interior of your Seattle home or you’re thinking of doing so in the near future, you may be wondering whether it’s possible to deduct a remodel as part of the calculation. You’re considering a major investment, and it sure is beneficial to lower your tax liability to cushion the blow. Although you’re not able to claim the entire investment as a deduction but there are deductions that you should explore.
You can deduct any sales tax you paid on your remodel
It’s a simple one and can be a big benefit for homeowners who are remodeling particularly on major, high-priced renovations, like kitchens, additions, and whole homes. Seattle’s sales tax rate of approximately 10% is one of most high in the United States, and it pays to take out the state and local taxes that you paid for your home remodeling when you file your Federal tax return. (Look up what your city’s tax amount here.) If you’re working on an DIY project, make sure you keep receipts for materials. If you hire a remodeling firm, they will act as your representative in the eyes of the IRS which is like if you had purchased the items yourself. Inquire about an overview of the sales tax they collected for you all through the calendar year. (At CRD, we automatically forward these year-end sales tax summaries to all of our customers.)
One thing to note is the fact that you do not need be paying the sales tax within Washington State on services, for example, design. This is the reason that CRD Design Build CRD Design Build, we invoice our design at an hourly rate and do not collect sales tax.
Deduct medically related home improvements
If you’re a person who has a disability or handicap, or if you have a family member who is handicapped who lives within your home and you live in a handicapped area, you might be eligible to claim a substantial home improvement tax deduction on the federal tax for medically necessary home renovations. Here are a few illustrations from IRS of the items you could be eligible to deduct.
– The construction of entry or exit ramps into the residence
– Doorways that are widened at entrances or exits to the residence
– In other words, widening or changing entrances to hallways or interior doors
– Installing railings, support bars or other modifications to bathrooms
– Reducing or making other modifications to kitchen cabinets and equipment
– Altering the location or modifying the electrical outlets and fixtures
– Installing porch lifts or other kinds of lifts (an elevator however, could contribute to its fair market value for the home and any deduction will have to be reduced accordingly.)
– Modifying the fire alarms, smoke detectors and other alarm systems.
– Modifying stairs
– Add handrails and grab bars, whether or in bathrooms
– Modifying hardware on doors
– The modification of areas at the front entrance and exit doorways
– Grading of ground for access to the residence
The above list is just a guide, not an exhaustive list. One thing to keep to keep in mind that IRS will only let you deduct the amount of a medical renovation that does not increase worth of the home. For instance, if your doctor recommends installing an exclusive pool to alleviate a medical condition however, you might not be qualified to deduct it since it will add value to your home. However, if the swimming pool is more expensive than the value it will add, you are able to deduct the difference.
Take the amount of interest you pay on the home improvement line of credit or loan
Mortgage interest deduction is one of the most well-known itemized deductions Americans use. It permits homeowners to take deductions for the interest they pay on their mortgages of their primary or second home, but it allows to allow the deduction in interest from mortgages secured by your home, meaning home renovation loans as well as HELOCs.
At the time of this writing as of this writing, the deduction has been significantly altered as a result of tax reform legislation passed by Republican tax overhaul bill The overall limit was cut and the capability to deduct interest on a renovation loan or HELOC is changed. The changes will be in effect for the year 2018 tax year, and we will be publishing a second article to clarify the new guidelines shortly. While you wait, contact your CPA to determine if you’re still eligible to take this deduction.
Get a tax credit for solar panel installation
The deductions for energy efficiency home improvements (such as insulation upgrades) expire in 2013, this solar tax credit was renewed recently. It offers a staggering 30% federal tax credit upon building a brand new photovoltaic or solar hot-water system, in addition to charges for the installation. Tax credits are better than deductions. tax credit is superior to a deduction because it allows you to directly write off that amount from the federal taxes that you owe. The 30% will gradually drop down to 22 percent over the next few years. Make sure to make sure to check the status on the Database of State Incentives for Renewables and Efficiency.
Reduce the capital gains tax when you sell your home
Some of the greatest tax advantages you’ll get through a home renovation may come years after you’ve completed the remodel. It’s because the cash you spend on home improvement projects can be counted towards your home’s adjusted basis. That is, when you sell your home then the IRS will take a look at the amount you originally paid (your house’s value) and subtract that from the sale price, which is the amount that could trigger you to pay capital gain tax. Any qualified improvements are subtracted from this amount.
For instance, if you buy your home for $500,000, invest $200,000 on remodeling projects that are qualified when you eventually sell it at $1,000,000, your capital gain would be valued at $300,000 instead $500,000 due the amount that you used to remodel.
Before you get too exuberant, you should remember that, under the current tax law (which could change in legislation like the Republican tax bill), you are allowed to essentially write off the first $250,000 capital gains each time you decide to sell your home. This number increases to $500,000 for couples who file jointly. But if you move out of your home in Seattle and the surrounding areas, where prices have been climbing rapidly it is possible to be able to make upwards of $500,000 in profits over what you paid initially.