Starting a home improvement project can be a costly endeavor nowadays, so homeowners need to be financially savvy. However, many homeowners are not aware of the tax deductions they can get on certain home improvements that will make their projects more affordable than they realize. From a taxation point of view, home improvements are considered those that add value to your property, adapt it to new uses or simply increase its usefulness.
Since most home improvements are paid for using loans, it is even more useful to know which of them you can deduct. Since not all loans are created equal, not all of them can be deducted either. Let’s look at which loans qualify for tax deductions below.
Loan Interest Deductions
In order to qualify for a deduction, the loan must be made for what is typically considered a “capital improvement”. As a rule of thumb, a capital improvement should boost the value of your home when reselling it, adapt it for new uses or improve its longevity.
For instance, new kitchen appliances or new carpeting are things that simply increase your comfort. They are considered “perishable” and taste-related improvements, which new owners may not appreciate. On the other hand, a new roof, replacing windows, adding a new room or bathroom, preparing the house for someone with disabilities or converting an existing room into an office will qualify for an interest deduction.
Also, I should point out that repairs do not usually fall within the deductible category, unless you can prove they were part of a bigger remodeling project. Here is an example: when you are installing replacement windows, you may also need to repair the rotten wood in the frames. This type of repair qualifies for a tax deduction.
Types Of Home Improvement Loans That Qualify For A Deduction
Before signing your loan, it is advisable to make sure that it falls within a deductible category. Depending on your interest rates and size of the loan, the savings you can make by deducting it can add up to 20% of the overall cost of the project.
- HELOCs (Home Equity Lines of Credit) are one of the most popular choices. They can be used for more than one purpose and their interest is typically tax deductible.
- Some 203K mortgages: if you need to perform repairs or remodels in order to make your new home livable, you can usually deduct the interest (or part of the interest of 203K mortgages). However, before starting the project, make sure it falls in the acceptable categories.
The deductions for both of these types of mortgages apply to secondary homes as well, giving you an extra reason to take a good look at your loan contract before signing it.
In addition to loan interest deductions, some home improvements can benefit from additional tax exemptions – again, typically those that increase the value of your home. Visit www.irs.gov and check out publications 523, 530, and 551 to get more details on which projects qualify.
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