Tax Credits versus Tax Deductible Home Renovation Costs
If you’re thinking about making updates to your home, you could find that in some cases, you’ll get more than just a nice new look. That’s because there are some home improvements that could help you to reduce your tax liability.
What exactly is the difference between a tax deduction and a tax credit?
The biggest difference is that a tax deduction can lower the amount of income that you pay taxes on. In this case, a tax deduction can reduce the amount of your taxable income by the percentage of your highest federal income tax bracket. Therefore, with less taxable income, the amount of tax that you owe can also be less.
On the other hand, a tax credit can give you an actual dollar-for-dollar reduction on the amount of tax that you owe. In this case, if you make certain energy-efficient upgrades to your home, you could be eligible for tax credits.
For instance, making upgrades to solar, geothermal wind, and fuel cell technology all qualify for tax credits. It is also possible that you could qualify for rebates and/or other incentives from area utility companies and HVAC manufacturers.
For tax purposes, a home improvement can include any work that is done that “substantially adds to the value of your home, increases its useful life, or adapts your home to new uses.” Some common examples of home improvement(s) include:
- Upgrades to the electrical wiring and/or plumbing
- A new roof
- New bathroom(s)
- Room addition(s)
- Upgraded or new driveway
Although these improvements are not directly deductible on your income tax return, they can help to raise the basis of your home, and in turn, reduce the amount of profit – and the potential amount of tax you owe – when you sell it.
That being said, if you qualify for the home office deduction, you could deduct 100% of the cost of improvements that are made to your home office without having to sell the property. So, if you turn one of the bedrooms in your home to an office, and you make improvements such as installing built-in bookshelves, you could depreciate this cost as a business expense.
If you own property in Orlando or the Central Florida area and you’re considering a home renovation, give LP Design and Renovation a call at (407) 901-6215 or send us an email at https://lpinspiredrenovations.com/contact/ and let’s set up a time to chat. You may find that the updates you make to your home can pay off in many ways.