Most homeowners already know that making major home improvements can greatly increase the value of their home. But did you know that adding lasting value through major home improvements can also provide opportunity to decrease your tax bill upon the sale of your home?
Increase Your Cost Basis, Lower your Taxes
It’s important to understand that most home improvement projects are not tax deductible in the traditional sense, but some may help to increase the “cost basis”. The cost basis is the original purchase price of the home adjusted with any major improvements or depreciated. This cost basis is then used to determine the “capital gains” or profits (losses) on the property once it is sold.
Improvements expenses such as major home improvement projects like a major kitchen or bath remodel and a home addition can be added to your cost basis. So the cost of the home improvements you undertake can be deducted from the profit you earn from the sale of the home.
The formula to determine the amount of capital gains taxed from selling your home is the selling price minus the cost basis. The remaining profit, or what the IRS calls the “capital gain”, is the amount you are ultimately eligible to be taxed on.
What improvements are eligible to be added to the cost basis?
It’s important to understand exactly what home improvements are able to be added to your “cost basis” so that you can take advantage of this potential tax break when you sell your home. You may add the following types of home improvement projects to the cost basis:
- Finished Basement
- Remodeled/New Bathroom or Kitchen
- Major Home Additions
The IRS distinguishes between a capital improvement that increases your home’s value and normal repairs such as painting your house. Most repairs that return your home to its’ original condition are are considered non-eligible and won’t increase your cost basis. However, improvements that last more than a year and add value to home are eligible, as long as they are still apparent when your home is sold. This are the major remodel projects.
A major home addition can be factored in to your cost basis when selling your home.
A fully finished basement can also classify as a major and permanent home improvement.
Taxable Capital Gains
Why do you want a higher cost basis? Most homeowners are exempted from paying taxes on the first $250,000 of capital gains for single filers, $500,000 for join filers. This means that if you bought your home for $200,000 and remodeled your bathroom for $50,000 you would have a cost basis of $250,000. If you then sold your house for $475,000, you would have $200,000 is capital gains meaning you would be tax exempt. However, if you did not factor in your bathroom remodel you cost basis would only be $200,000 causing your capital gains to be $275,000 and subject to taxes over the $250,000.
So besides getting a great new basement or bathroom, the professional work you have done by the design build experts at Reliable Home Improvement may help to reduce taxes upon the sale of your home. It’s important to discuss all options with a tax professional when you do sell your home as this blog post is simply a summary of general information on the ways home improvements can help your financial status.
Contact the design build experts at Reliable Home Improvement to start your major home improvement project today.