In spring, we turn to thoughts of gardening, home repairs, refurbishments, and maybe even remodeling. Let’s look at common tasks and see what the tax ramifications are. Is anything deductible? Probably not—but don’t despair. I have some tax tips for how to find a tax credit (or two) available to you.
Before going forward, set up two permanent files for home improvements—one for big costs and the other for routine maintenance. You may use a drawer (if you’re doing a lot of repairs), an envelope, an accordion file, or a folder on your computer or portable device. It doesn’t matter how; just make sure to file every document (or a copy) related to the improvements. This will help with your taxes (now or when you sell your home). It will also help with warranties and/or further repairs if you ever need to seek a specific part or color.
What can you deduct?
For tax purposes, a house can be used several different ways. It can be used exclusively as your home; it can be used as a home and office (Form 8829); it can be used as a rental property (Schedule E); or it can be used in any combination of these.
In general, when you do repairs around the home (like routine maintenance, gardening, or pool care), none of them will be deductible for tax purposes. However, when you use the home as a business or rental, the business percentage of the expenses can be deducted.
In certain cases, if you are making the improvements for medical purposes, you may be able to claim a medical deduction. Get a letter from a physician and read the rules carefully—they’re a bit complicated.
What kind of repair are you making?
Dealing with larger, more expensive repairs (like roofing, new windows, or landscaping), we always face the argument—is it a repair or a capital improvement? If it’s your home and you want to increase your cost (or tax basis), you want to treat these as improvements to your home.
Flag these types of receipts and add them to the purchase cost. When converting the property to a rental, this will increase your depreciation. When selling the property, it will reduce your profit.
Don’t scoff. Sure, you get to avoid paying taxes on the first $250,000 ($500,000 for couples) of profit. You don’t think you’ll ever have a profit that high? Folks who bought homes for $30,000 in the 1980s certainly never expected those homes to be worth a million dollars today. That could happen to you after 20 or 30 years, too.
Understanding tax credits
For tax credits, the American Taxpayer Relief Act of 2012 (ATRA) brought back the nonbusiness energy credit for residences (Form 5695). It’s retroactive to January 1, 2012. The credit covers costs of things like roofing, insulation, double-paned windows, and so on. Unfortunately, it’s limited to a lifetime credit of $500. If you’ve already used any part of this in the past, you have probably gotten more than a $500 benefit.
The first part of Form 5695 is for the renewable energy credits, like solar power, wind, and thermal energy. That has no ceiling and is worth 30 percent of your qualified expenditures. (Read the rules carefully and make sure you have all the correct paperwork in hand before claiming the credit.)
When using any credits, you must reduce your home’s cost or tax basis by the amount of the credit.
Do some research locally as well. Your city, state, or utility might also offer incentives for energy-saving improvements.
Eva Rosenberg, EA, is the publisher of TaxMama.com®, where your tax questions are answered. She teaches tax professionals how to represent you when you have tax problems. She is the author of several books and e-books, including Small Business Taxes Made Easy. Follow her on Twitter: @TaxMama