Important Note: Below is general information on how taxes apply to home renovations. This is for informational purposes only and does NOT replace the guidance of a tax professional. Please consult a tax professional for the most accurate and up-to-date information.
Everyone loves a tax break and hates a tax bill. We will go over some of the basics of home related taxes to help you maximize the former and minimize the latter.
Please keep in mind that tax laws are in a constant state of flux and that you should always ask a tax professional for the latest tax information. The following information is necessarily general in terms and subject to going out of date once this sentence is finished because…taxes.
What You Can and Can’t Deduct
What is or isn’t deductible changes from year to year. The following reflects the facts as the rules sit for 2020 returns.
Any expense related to keeping your home functional is not a deductible expense. Anything you spend improving the value of your home is also not deductible but can be added to the cost basis of your home.
Your home’s cost basis only comes into play when you sell your home (it’s the total cost of owning your home vs. the amount you paid at purchase). The selling price minus your cost basis is your capital gains (the part on which you owe taxes), not counting actions taken after you sell your home such as reinvesting the profit into a new home.
To put it simply, home maintenance costs cannot be deducted from your annual taxes. Here is a partial breakdown of what is considered maintenance vs. upgrades:
- Repairs to plumbing or electrical systems
- Repairs to your roof or gutters
- Repairs to a driveway
- Repairs to floors
- Any repair for functional purposes
- Major replacements such as a roof
- Putting up a new fence
- New plumbing or electrical wiring
- New gutters
- Repaving your driveway
The simple rule is that if it keeps what now exists functional it is a repair and won’t impact your taxes unless the repair was for a business property or rental. If it adds to or entirely replaces what currently exists it is a home improvement and can be added to your home basis.
The sole exception to home improvements affecting your annual tax bill is the various Energy Star tax credits for renewable energy improvements and energy efficiency upgrades to appliances.
There are tax credits available for adding renewable energy sources such as solar panels to your home and for buying Energy Star rated appliances. The current credit for major installations is 30% of cost with the percentage declining each new year of the program.
There are many other deductions available to homeowners that fall outside of renovations. Some we will explore later but others, such as rental expenses, we will leave for another day entirely. Always look to IRS.gov for the latest on tax deductions as their site is almost always the most up to date.
Related Article: How to Choose the Right Contractor
If you are an investor, there are several categories of deductions and tax breaks that apply to your activities. Below is a short list of the options you should investigate along with links to the relevant information.
- Depreciation – Rarely an issue with residential properties, depreciation can come up frequently in commercial property.
- 1031 Exchanges – A 1031 is an even exchange of properties outside of the simple reinvestment of profits from selling your home.
- REITs – A Real Estate Investment Trust is a form of company involved solely in the buying and selling of investment properties.
- Opportunity Zones – Opportunity zones are specific areas designated to allow business owners to enjoy specific tax advantages to entice business into economically depressed areas.
Property taxes differ from county to county and certainly from state to state. Your best bet is always to look for local advice on property tax issues. With that in mind, there are still some federal level concerns along with certain general processes that exist, in one form or another, in each locality.
Federal deductions for state taxes have now been capped at $10,000. So if your state income taxes exceed that amount, don’t even worry about deducting your property taxes from your federal taxes, for you’ll have already maxed out your deduction.
For the rest of you, your property taxes can indeed be deducted from your federal tax bill. Then again, you are facing a happier problem of needing your itemized deductions to exceed the $12,000 standard deduction allowed for each individual ($24,000 per couple). Unless you are a business owner, that is a high bar to cross.
Fighting an Assessment
If you feel your property taxes are too high due to an overvalued assessment of your home, you can ask to have it changed. This will likely necessitate a visit from another assessor and must be backed by the reason you feel the assessment was too high.
The most straightforward case here is just citing what you paid. If you just purchased the house for less than its assessed value, then you should easily be able to get an abatement.
One easy way to avoid a bad assessment is to grant the assessor full access to your home when they come by. This prevents them from having to guess at the conditions inside, which can result in a higher assessment.
If You Get Behind
If you find that you are behind in your property taxes, get on top of the problem as soon as possible. As long as you are in communication with your county treasurer, the chances of losing your home over overdue property taxes is small.
There have been stories of predatory counties in the news here and there but overall, they don’t want your home, they want their taxes. Taking a home is often unprofitable for the county so they have every reason to work with you on a payment schedule. However, if you try to wish it away and refuse to talk to them, they won’t have any choice but to foreclose on your property.
The capital gains tax is a tax on profit from investment activity. Your home is considered an investment and the proceeds from its sale are considered capital gains. You can avoid taxation on the profits if you invest them into a new property or engage in other investment activity. There are also spousal provisions that may allow exceptions under certain conditions. As always, talk to an expert to get the most up-to-date information.
Home Cost Basis
Your capital gain is derived from taking the selling price of your home minus its cost basis. Your home’s cost basis is the amount you spent to purchase the home plus all money spent improving the property. You can’t count home maintenance or repairs, nor can you count your property taxes toward calculating your home’s cost basis. All numbers you do use must be backed up by detailed records, so make sure you keep every receipt throughout the time you own that home.
Selling your home involves a ton of paperwork on its own and calculating your taxes afterward requires even more. If you haven’t been keeping meticulous records on your home start right now and never stop. The better your record keeping the more of the profit you will be able to keep in your accounts.
Now, this has been a light touch on the subject of taxes and your home. The full accounting of all the tax concerns that come with owning and selling a home would fill up its own website. Always be sure to talk to an expert and to plan far ahead. Mistakes made a decade ago may well haunt you when you sell your home today. Take steps now to prevent such problems in the future.
Home Ownership and Taxes in Canada
There are many tax programs for homeowners in Canada that you can take advantage of when filing your taxes. If you are considering your next move, it would help you to become aware of these programs as well. Decisions made now can affect your tax situation years down the road.
The information below is not meant to replace speaking to a tax expert. Tax law is constantly changing, and it requires a certain level of diligence and expertise to keep up. Follow this link to the Canadian government’s home owners page for their tax laws.
There are several tax credits for homebuyers and homeowners in Canada. Some of the available credits include:
- Homebuyers Credit – this is for first time homebuyers and can be quite helpful to new homeowners
- Home Accessibility Credit – tax credit for renovations to your home to make it more accessible to a resident that has mobility issues
- GST/HSTCredit – program allowing some buyers to recoup some of their sales taxes including rental properties
- Provincial Based Credits – There are a number of provincial tax credit programs available
Selling Your Home
There are rigorous reporting regulations that come with selling your principal residence in Canada. However, you can also qualify to recoup some of your moving expenses. You also must report your capital gains and pay applicable taxes.
Be certain to speak to a tax expert before you make any property changes in Canada as there are many rules and regulations that may not be immediately obvious, especially when dealing with registering your principal residence. As always, be careful and plan, plan, plan ahead.