With the April 18 deadline looming for filing federal and most states’ 2016 tax returns, new and prospective homeowners might be wondering which deductions their residence could provide them.
Many expenses are allowed and some are not, but if you do decide to go for it, the first rule is:
This might sound daunting, especially if this is the first time you’ve ever itemized. But if you’ve held on to your receipts and know where to access them, itemizing can be a breeze, especially if you’re using a program like TurboTax, which will walk you through the entire process.
The following items are usually eligible for a tax deduction:
That’s a big question because not all home-related expenses can be taken in a given tax year. Many can only be taken when you sell your home, which is why holding on to all those receipts, and faithfully entering them into a program such as QuickBooks or Quicken, can be a big help.
When it’s time to deduct, you can quickly generate reports that will help you complete your tax return. Even just entering them into a common Excel template can be a real timesaver.
In general, these deductions include any home improvement involving work that substantially adds to the value of your home, increases its useful life, or adapts it to new uses.
Home improvements can be important when you sell your home because they’re included in its adjusted cost basis. The bigger your basis, the smaller your capital gain, and that means can mean a lower tax liability.
To qualify as a tax deduction, the home improvement must:
For most people, home improvements–even major ones–won’t help their tax situation until after the home is sold. Nevertheless, keep track of what you paid in home improvements over the years not just for potential tax savings, but also to help justify your selling price.
The capital-gains exemption is a nice bonus if you sell your principal residence after living in it two to five years. It lets you make up to $250,000 in non-taxable profit if you’re a single owner, and $500,000 if you’re married. You don’t even have to buy another home with the proceeds. You can spend the money any way you want. Better yet, there’s no limit on the number of times you can use this exemption. In most cases, you can make tax-free profits.
If you’re in doubt or have questions about what’s deductible, it’s always a good idea to consult a tax accountant or lawyer.