Home Improvements aka upgrades versus repairs.
Here are some things you need to know about home upgrades.
Investing in home improvements really works to help beat your competition in getting your home sold faster, for more money than you would if you had not done any updates to your home. Sometimes you can net more money, which is another reason why even a small improvement like fresh neutral paint and new carpeting is worth the investment.
It’s important to know the difference between a repair and an improvement. The IRS defines a repair as anything that's necessary to keep your home in good condition but doesn't necessarily add to its value. An improvement is anything that prolongs the useful life of your home and has the potential to increase its resale value.* If you want to take advantage of the available tax perks, your project needs to fall under the home improvement category. You can learn more about the difference between repairs and improvements on IRS Publication 523 *or by reaching out to your tax advisor. Please keep in mind that not all home improvements are tax deductible, however.
KEEP THOSE RECEIPTS FOR TAX BREAKS.
If your home increases in value (whether through appreciation or upgrades) and you turn a profit when you sell, that profit — known as capital gains — will be taxed. However, you can reduce the amount of capital gains taxes you owe by increasing your adjusted cost basis. Your cost basis is what you paid for the home, plus costs incurred (including home improvements). A higher adjusted cost basis means a lower capital gains tax, so be sure to keep receipts and paperwork from home improvements you make to increase your adjusted cost basis when you're ready to sell.
You can still claim a tax credit for solar water heaters and solar panels through 2021. Currently, the tax credit is 30% of the cost, including installation. The credit decreases to 26% for tax year 2020 and drops again to 22% for tax year 2021.
Renovations that are made to accommodate a medical disability can typically be deducted on your taxes. Examples include adding a wheelchair ramp, widening doorways, adding handrails or support bars, and installing lifts. There are some limitations, and you must itemize deductions instead of claiming the standard deduction, so be sure to talk to your tax advisor first.
The annual Cost to Value report is also helpful when considering upgrades and their return of investment. The idea of making upgrades to a home is imperative when selling a home; however, many people think they will get back 100% of that investment but that is not necessarily the case.
Real estate is in constant flux, determined by supply and demand, location and economic factors, as well as seasonality and condition of the property. These are variables that bring their own unique set of circumstances. Working with a professional full service Realtor® can help identify them for you specifically. As you know, not every home is a cookie cutter. For more advice on making improvements to your home cost effectively, especially if you are thinking of selling, please feel free to contact me direct. Gloria Now at 630-664-6854.