Home improvements for tax deductions to consider

Home improvements that qualify for tax deductions typically fall into one of these four categories:

• Renovations for medical conditions
• Eco-friendly home upgrades
• Home office additions
• Improvements made to sell your home

However, as with all things taxes, it’s not that simple. Which home improvements are tax deductible depends on the scale of the project, how you use the renovated space, and more detailed criteria. Plus, some states may have different tax requirements than others. With that in mind, let’s get into what you can generally expect to qualify.

Renovations for medical conditions

Accessible home modifications are often eligible for tax deductions. These include medically necessary home improvements intended to make the home livable for a person with a disability who resides in the home.

Common deductible home improvements for accessibility

• Widening doorways
• Installing stair lifts and ramps
• Installing voice-activated control systems
• Installing handrails and grab bars throughout the home
• Converting standing showers and tubs to include accessible seating

Eco-friendly home upgrades

In case helping out the planet (and lowering your utility bill) wasn’t incentive enough to go green, many home improvements for energy efficiency can help you qualify for more tax deductions. Barring very few exceptions, these deductions can only apply to your existing home, not a new home you’re constructing from the ground up. 

Common deductible home improvements for energy efficiency

• Installing ENERGY STAR-rated doors and windows
• Installing ENERGY STAR-rated appliances
• Installing solar panels
• Replacing insulation materials

Pro Tip: What does an ENERGY STAR rating actually mean? ENERGY STAR-rated products meet strict energy efficiency standards set by the US Environmental Protection Agency. Learn more here.

Home office additions

If you run a business from home, you may be able to deduct that space from your taxes. In general, your home office needs to be an exclusive part of your home that you use only for conducting business on a regular basis. Your home office should also be your principal place of business. If you spend 9-to-5 at a storefront and use your home office to catch up on overtime tasks, that home office space likely won’t qualify. 

Common deductible home improvements for your home office

• Installing new equipment needed for work (such as a new printer)
• Renovations made to your entire home that impact the office (such as new floors throughout)
• Repairs made to the office exclusively

Pro Tip: Most home office tax deductions are based on the percentage of your home’s square footage that the office occupies. So, first things first, bust out that measuring tape.

Improvements made to sell your home

If you sell your home for more than you paid for it, that’s called capital gain. And in tax world, capital gain is, you guessed it, taxable. Luckily, it’s possible to reduce the amount you’re taxed for that capital gain based on how much money you invested in the home. Even if those renovations weren’t necessarily made with a sale in mind at the time, you could still qualify. 

Common deductible home improvements for home sales

• Structural additions, like a new garage
• Landscaping installations, like a swimming pool or firepit
• Plumbing or HVAC upgrades
• New flooring

As a general rule of thumb, upgrades required to maintain the livability of your home do not qualify. For example, the cost of repairing a leak in the ceiling won’t be eligible for a deduction.

Other potential home improvements for tax deductions

If you own a rental property, home improvements generally are not deductible. However, you may be able to deduct the cost of necessary repairs to the property. Whether or not a home improvement project on a rental property is considered deductible essentially comes down to whether that repair was necessary to make the home livable (deductible) or whether it was simply enhancing the space (not deductible). Additionally, you should look into specific state or local tax deductions for home improvement projects. Depending on where you live, you may have more options than you think.

Bottom line? Homeownership can offer so much more than just a place to live. Tax deductions for home improvements are just one way to make the most of your investment.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

Not only can renovations boost your home’s value, but some projects could qualify you for more tax deductions.

The post Top Home Improvements for Tax Deductions appeared first on Cardinal Financial.

Getting Started

Building a home isn’t as simple (or as fast) as it appears in those home renovation shows. Teams don’t just show up with a truckload of 2x4s and some concrete. It takes time and coordination to do it right. When going custom, you typically have two “ins,” one of which is far easier than the other. 

Congratulations, whether you’re a first-time owner or someone who’s getting around to building the custom home you’ve been working for your whole life, you’re about to embark on an exciting process.

Option one? Go with a builder that already owns a plot of land and is selling empty lots for your future home. These are typically planned neighborhoods that you’ll have limited control over. You go in, pick a lot, select your finishes, and get financing. It’s straightforward and easy, but doesn’t allow the versatility that a fully-custom home likely would. After all, these planned neighborhoods usually feature set, blueprinted styles and more affordable materials.

Option two? Secure your own lot and hire an independent builder to build a custom home from foundation to finishes. This route is more involved, but grants the buyer (that’s you) more control over the process. 

Custom Construction Loans

Let’s say you opt for option two. In this choose-your-own-adventure story, you’re again looking at two routes:

1. You need a plot of land to build on. Unless you already have one, you’re going to need to buy one. You could obtain separate mortgages for both the land and the construction, but this requires two applications, two underwritings (which means double the credit hit), two closings, and will result in two mortgage payments. 
2. Alternatively, you can go for a one-time close loan. This accessible loan type allows you to bundle the purchase of the land and the labor into one loan. That’s one down payment, one closing, and one mortgage payment. If this option sounds like a better fit, get in touch with one of our experts to discuss the ins and outs of one-time close loans.

Looking Ahead

Next up? A whole host of steps…

Plans

If you’re hiring an independent builder, they may have existing home plans you can choose from. If not, or if you’re looking for something different, you can purchase new plans. Heads up, though: new plans may cost you, but it’s up to you to decide how the cost compares to the outcome. 

For pre-drawn plans, expect to pay upwards of $2,000 or more. For custom floor plans that allow you to map out pretty much every aspect of your home, expect to pay upwards of $10,000 or more. Note: These price points are estimates based on industry norms, but the exact cost will vary depending on the builder you choose.

Builders

When picking a builder, you’re going to want to do your research. Contractors can sometimes get a bad wrap for skipping out on work or using cheap labor and materials, but that’s not always the case. Our advice? Read as many reviews as you can, seek out referrals, and interview multiple builders before selecting one that you feel is equipped to build your dream home. 

Permits

Permits are required for just about every part of the construction process, as are inspections for the work being completed. Adding gas lines? Permit. Grading a yard? Permit. Wiring? Permit. They can be time-consuming and expensive to obtain, but they’re vital because they often require plans. Plans are beneficial because they show that your builder has the professionalism and foresight to hit deadlines and keep the project moving forward. 

Construction

When your team is ready to build, here’s a rough idea of the process you’re looking at, from start to finish:

• Preparation (grading, leveling, etc.)
• Foundation (crawl space vs. slab)
• Framing
• Rough plumbing, electrical, and HVAC
• Siding, roofing, and insulation
• Drywall and fixture installation
• Countertops and flooring
• Finishing touches
• Final walkthrough

Inspection

Not only will local and state officials come through to verify your home’s work is up to code, this is also your chance to look for anything you want taken care of before signing off.

Here, nothing is too small to bring up to your builder. Sure, things will settle over time, but you’ll want to keep an eye out for drafts, leaks, flickering lights, doors that aren’t level, and consistent paint coverage. Not sure about something? Ask your builder. 

After all, this is your home, your expense.

Building Is Great Because…

While building a house might be more complicated than buying an existing home, it comes with its own set of benefits. For starters, what’s not to love about whole-home customization? We’re talking location, layout, lighting, flooring, fixture finishes, equipment…everything. 

With that customization, you get access to new options for energy efficiency, meaning your new construction home can help you save on bills while saving a little bit of the environment. And, because you’re building from the ground up, you face little to no competition with the rest of the housing market.

Downside? The COVID-19 pandemic continues to have lasting impacts on the industry, meaning lead times are longer and materials are more expensive. Speaking of expenses…

The Cost of Building

Details vary, but Architectural Digest reports that building a house can cost anywhere from $500 to $1,000 per square foot depending on location. Meanwhile, American Home Shield’s 2022 American Home Size Index shows that the average size of a house in the United States is roughly 2,500 square feet. 

Crunching the numbers shows us that building a house that size can cost anywhere from $1.2 to $2.5 million—averaging out to $1.875 million. 

If that number caused your jaw to drop, take this bit of solace: Other resources pin the average cost of a custom, similarly sized home at roughly $500,000—just a little north of the average “sold” price of a home in 2022. 

What’s it all come down to? When building a house, your location, equipment, and finishing touches will push your costs up or down. The safe bet is to leave some cushion in your budget, just in case. Even safer? Get pre-approved for construction loan financing with a lender you trust (ahem, we know one).

The post What To Expect When Building a Home appeared first on Cardinal Financial.