Want to spruce up your home? You’re not alone. More than one-third of Americans are planning to remodel their homes within the next five years. If you’re like most Americans, your house is one of your biggest expenses, and it’s important to keep it up to date and in good condition. But not all home improvement projects add significant value to your home. Keep reading to find out which projects offer the most bang for your buck and which to avoid if you plan to sell soon. Then discover the projects that can help you save money on your taxes.
You may be weighing whether it’s more advantageous to renovate your house or sell it as is. Most homebuyers want move-in ready homes and will pay substantially less for fixer-uppers. Moreover, some lenders won’t loan money for houses in poor condition.
It’s usually a good idea to do non-cosmetic repairs, such as replacing a worn-out roof, patching holes and cracks, painting the interior and exterior, fixing broken appliances or heating systems, repairing broken faucets or pipes, and fixing building-code violations that will be flagged during an inspection. It may also be worthwhile to remove old wallpaper and paneling, replace dated carpeting, refinish damaged hardwood floors, and do basic landscaping to improve the house’s curb appeal.
More extensive renovations probably won’t pay off if you’re selling soon. Homeowners rarely get a dollar-for-dollar increase in market value for major improvements. For example, if you add a $123,000 master suite to your house, you’ll recoup only about $70,000 on the resale value of your home, according to Remodeling Magazine. For a mid-range kitchen remodel, you’ll recoup about 57 percent of the cost, and for a mid-range bath remodel, you’ll recoup about 70 percent of the cost.
Talk to a local realtor before you do any renovations. He or she can help you understand what homebuyers expect in your area. Also, tour similar houses for sale in your neighborhood and note the condition and amenities. If you determine your house needs improvements before you put it on the market, focus on renovations that provide the most payback. In general, expensive, high-end improvements pay off least.
Staying Put for Five Years or Longer?
It makes sense to stay in your house and renovate if you love your neighborhood or schools. While it’s a good idea to keep your home’s resale value in mind no matter when you plan to sell, you can put your family’s quality of life front and center if you plan to stay for a while.
What bothers you most about your house? Broken cabinets, old appliances, a dated bathroom, a funky layout? That’s what you should improve first. In 2017, the most popular remodels were:
- Whole-house remodels
- Room additions
- Replacing windows and doors
If you’re over the age of 75 or live with an aging relative, it may be time to improve your house for ease of living. Forty-six percent of homeowners renovate their homes in anticipation of getting older.
- Adding pullout shelves to kitchen cabinets
- Changing doorknobs to lever handles
- Installing smart thermostats
- Installing smart blinds and drapes
- Installing smart lighting
- Replacing lower kitchen cabinets with drawers
Save Money on Your Taxes
Most home improvements aren’t tax deductible because they’re considered personal expenses. But certain renovations may help you save money on taxes if they fall into the following categories.
Renovations on a home office
Are you self-employed and work at home? If so, you can deduct 100 percent of the cost of improvements you make to your home office. For example, if you replace the windows in your office, you can deduct the entire cost of supplies and labor as an office expense.
You may also be able to deduct a percentage of whole-house repairs. To figure out how much you can deduct, divide the square footage of your house by the square footage of your office. For example, if your house is 1,000 square feet and your office is 100 square feet, you could deduct 10 percent of the cost of whole-house repairs. That means if you painted your entire home at a cost of $500, you could deduct $50 as an office expense.
As of 2018, only self-employed workers can deduct home-office expenses. If you work for an employer and have a home office, you’re no longer eligible.
If your roof faces south, east, or west and gets at least five hours of sunshine a day, it may be worth outfitting your house for solar electricity—especially because the federal government offers a generous tax incentive. In 2018 and 2019, the IRS will give you a tax credit for 30 percent of the cost of the project. In 2020, the federal credit drops to 26 percent. In 2021, it will be 22 percent, and after 2022, it will expire for private residences. In addition, many states offer their own tax incentives. For instance, Arizona offers a tax credit of up to $1,000.
A standard solar system costs about $16,000 and will be about $11,000 after factoring in the federal tax credit. Don’t forget, solar panels also help you save on electricity bills. How much you’ll save depends on how expensive electricity is where you live. California residents could save nearly $30,000 over 20 years, according to an analysis by energysage.com.
The federal government also provides tax credits for energy-efficient heating and cooling systems, water heaters, biomass stoves, windows, doors, insulation, and roofs recognized by ENERGY STAR®. You can get a $300 tax credit for installing an energy-efficient water heater and can recoup 10 percent of the cost, up to $500, of installing an energy-efficient roof. Your local utility company may offer additional rebates for renovating with ENERGY STAR® appliances.
Do you need to install ramps, modify bathrooms, widen doors and hallways, add handrails, install lifts, or make any other improvements for medical purposes? These expenses are deductible as medical expenses as long as the cost is reasonable and the improvement doesn’t increase the value of your property. You may also deduct the costs of operating and maintaining any medically-necessary improvements.
- Improvements funded by a mortgage or Home Equity Line of Credit (HELOC)
If you roll the cost of improvements into the acquisition price of your home and take out a mortgage to pay for them, you can deduct the cost of the loan’s interest on your taxes. The FHA 203(k) mortgage and the Fanny Mae HomeStyle Renovation mortgage are designed to help homebuyers pay for renovations.
Some homeowners can also deduct the interest on a Home Equity Line of Credit (HELOC). As of 2018, HELOCs must be used to improve a home and need to meet certain other requirements for the interest to be deductible. For instance, homeowners can only deduct the interest on home loans (mortgages and HELOCs) totaling less than $750,000.Cash-out refinancing is another option that may have tax benefits. Qualifying homeowners with significant equity in their homes can borrow up to 85 percent of the appraised value of their homes and walk away with cash for renovations. However, you may end up with a higher interest rate on your new loan.
If you plan to revamp your home soon, get savvy about which home improvements pay off and which projects can help you save money at tax time. By improving your house, you could sell it faster or transform it into your dream home.
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Source : TaxAct Blog