If you own a home, you will need to pay higher taxes in the form of property taxes. However, there are some ways in which you can use your home to lower the taxes you will need to pay through home renovations. There are also some home renovations that will increase your tax bill.
Financing Renovations Through Your Mortgage
The mortgage that you take out for your home can include extra financing that can be used to pay for renovations. You are allowed to deduct the interest from the money you took out for renovations from your income taxes.
Structural additions to your home will increase the amount that you will owe in taxes. This includes decks, large sheds, pools or anything else added to your property. The addition to your home may increase the value of your home, which might make the addition worthwhile when you sell your home. Therefore, it is important to factor in all of these considerations. This challenge often comes up when adding a bathroom. Upgrading from a one bathroom to a two bathroom home will make a big difference in the value of your home, but this will also increase your taxes.
You will receive a tax credit if you make renovations that make your home more energy-efficient under the Residential Energy Efficient Property Credit. You can install a solar energy system, a geothermal heat pump, a microturbine or a residential wind turbine in order to earn a tax credit. You are able to recoup up to 30% of the installation costs. One exception is the diesel-powered microturbine, which has a $500 cap.
Improvements That Qualify As Medical Expenses
If you must make an improvement that is considered a medical expense, the improvement can be deducted from your expenses. This can include a ramp, elevator or stairlift.
Some Renovations Do Not Affect Your Taxes
Repairs do not increase the value of your home and have no effect on your taxes. A repair simply returns your home to the original condition. For a renovation to be considered an improvement, it needs to last for longer than one year and needs to:
- Add value to your home
- Adapt it to new uses
- Prolong the life of your home
If it does not meet these criteria, you may not pay more in taxes as a result. But because it can be confusing determining whether your home renovations will lead to higher property taxes, it is recommended that you consult with a tax planner with experience with home renovations.