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What Home Improvements Are Tax Deductible?

In Buying a Home, Home Upgrades, Home Values, Houston Energy Corridor, Houston Real Estate Agent, Real Estate Investment, Selling your home on February 15, 2018 at 3:55 pm

The federal tax law signed by President Donald Trump Dec. 22, 2017, may affect home ownership tax benefits described in this article. The new law goes into effect for the 2018 tax year and generally doesn’t affect tax filings for the 2017 tax year. Here’s a detailed summary of the changes.

It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.

Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit — capital gain, in IRS-speak — you’re required to pay taxes on. In other words, you might have a tax break coming. Here’s how to know what home improvements are tax deductible.

The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

What Home Improvements Are Tax Deductible?

Some examples of home improvements you can deduct may include:

  • New bathroom
  • New addition
  • Basement finishing
  • New furnace
  • Master suite addition

Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.

Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.

There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.

There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement.

One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.

How Capital Improvements Affect Your Gain

To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.

Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the  15% tax rate on capital gains. Well worth taking an hour a month to organize your home improvement receipts, don’t you think?

Related: Tax and Home Records Checklist: What to Keep and For How Long

The top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.

Watch Out for These Basis-Busters

Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.

  • If you use the actual cost method and take depreciation on a home office, you have to subtract those deductions from your basis.
  • Any depreciation available to you because you rented your house works the same way.
  • You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received.
  • If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

By: Donna Fuscaldo

If you are interested in buying or selling real estate in the Energy Corridor, please contact Connie Vallone with First Market Realty at 713 249 4177  or visit  or .


Budget Kitchen Remodeling: 5 Money-Saving Steps

In Buying a Home, Home Upgrades, Home Values, Houston Energy Corridor, Houston Real Estate Agent, Real Estate Investment, Selling your home, Terry Hershey Park, Uncategorized on February 7, 2018 at 4:03 pm

Major kitchen remodels are among the most popular home improvements, but a revamped cooking and gathering space can set you back a pretty penny. According to the “2015 Remodeling Impact Report” from the NATIONAL ASSOCIATION OF REALTORS®, a complete renovation of a 210-square-foot kitchen has a national median cost of $60,000, and you’ll recover 67% of that cost come selling time.

Despite the big price tag, you’ll be glad you upgraded. In fact, homeowners polled for the “Report” gave their kitchen redo a Joy Score of 9.8 — a rating based on those who said they were happy or satisfied with their remodeling, with 10 being the highest rating and 1 the lowest.

If you can’t afford the entire remodel all at once, complete the work in these five budget-saving stages.

Stage One: Start with a Complete Design Plan

Your plan should be comprehensive and detailed — everything from the location of the refrigerator to which direction the cabinet doors will open to whether you need a spice drawer.

To save time (and money) during tear-out and construction, plan on using your existing walls and kitchen configuration. That’ll keep plumbing and electrical systems mostly intact, and you won’t have the added expense — and mess — of tearing out walls.

Joseph Feinberg, vice president of Allied Kitchen and Bath in Fort Lauderdale, Fla., recommends hiring a professional designer, such as an architect or a certified kitchen designer, who can make sure the details of your plans are complete. You’ll pay about 10% of the total project for a pro designer, but you’ll save a whole bunch of headaches that would likely cost as much — or more — to fix. Plus, a pro is likely to offer smart solutions you hadn’t thought of.

For a nominal fee, you also can get design help from a major home improvement store. However, you’ll be expected to purchase some of your cabinets and appliances from that store.

  • Cost: professional designer: $5,800 (10% of total)
  • Key strategies: Once your plans are set, you can hold onto them until you’re ready to remodel.
  • Time frame: 3 to 6 months

Stage Two: Order the Cabinets, Appliances, and Lighting Fixtures

Cabinets and appliances are the biggest investments in your kitchen remodeling project. If you’re remodeling in stages, you can order them any time after the plans are complete and store them in a garage (away from moisture) or in a spare room until you’re ready to pull the trigger on the installation.

Remember that it may take four to six weeks from the day you order them for your cabinets to be delivered.

Related: How to Choose Stock Cabinets for Your Kitchen

If you can’t afford all new appliances, keep your old ones for now — but plan to buy either the same sizes, or choose larger sizes and design your cabinets around those larger measurements. You can replace appliances as budget permits later on.

The same goes for your lighting fixtures: If you can live with your old ones for now, you’ll save money by reusing them.

You’ll have to decide about flooring, too — one of the trickier decisions to make because it also affects how and when you install cabinets.

You’ll need to know if your old flooring runs underneath your cabinets, or if the flooring butts up against the cabinet sides and toe kicks. If the flooring runs underneath, you’ll have some leeway for new cabinet configurations — just be sure the old flooring will cover any newly exposed floor areas. Here are points to remember:

  • Keep old flooring for cost savings. This works if your new cabinets match your old layout, so that the new cabinets fit exactly into the old flooring configuration. If the existing flooring runs underneath your cabinets and covers all flooring area, then any new cabinet configuration will be fine.
  • Keep your old flooring for now and cover it or replace it later. Again, this works if your cabinet configuration is identical to the old layout.

However, if you plan to cover your old flooring or tear it out and replace it at some point in the future, remember that your new flooring might raise the height of your floor, effectively lowering your cabinet height.

For thin new floor coverings, such as vinyl and linoleum, the change is imperceptible. For thicker floorings, such as wood and tile, you might want to take into account the change in floor height by installing your new cabinets on shims.

  • Cost: cabinets: $16,000 (27% of total); appliances and lighting fixtures: $8,500 (15% of total); vinyl flooring: $1,000 (2% of total)
  • Key strategy: Keep old appliances, lighting fixtures, and flooring and use them until you can afford new ones.
  • Time frame: 2 to 3 weeks

Stage Three: Gut the Kitchen and Do the Electrical and Plumbing Work

Here’s where the remodel gets messy. Old cabinetry and appliances are removed, and walls may have to be opened up for new electrical circuits. Keep in close contact with your contractor during this stage so you can answer questions and clear up any problems quickly. A major kitchen remodel can take six to 10 weeks, depending on how extensive the project is.

During this stage, haul your refrigerator, microwave, and toaster oven to another room — near the laundry or the garage, for example — so you’ve got the means to cook meals. Feinberg suggests tackling this stage in the summer, when you can easily grill and eat outside. That’ll reduce the temptation to eat at restaurants, and will help keep your day-to-day costs under control.

  • Cost: $14,500 for tear-out and installation of new plumbing and electrical (25% of total)
  • Key strategies: Encourage your contractor to expedite the tear-out and installation of new systems. Plan a makeshift kitchen while the work is progressing. Schedule this work for summer when you can grill and eat outside.
  • Time frame: 6 to 10 weeks

Stage Four: Install Cabinets, Countertops, Appliances, Flooring, and Fixtures

If you’ve done your homework and bought key components in advance, you should roll through this phase. You’ve now got a (mostly) finished kitchen.

A high-end countertop and backsplash can be a sizable sum of money. If you can’t quite swing it, put down a temporary top, such as painted marine plywood or inexpensive laminate. Later, you can upgrade to granite, tile, solid surface, or marble.

  • Cost: $12,000 (21% of total)
  • Key strategy: Install an inexpensive countertop; upgrade when you’re able.
  • Time frame: 1 to 2 weeks

Final Phases: Upgrade if Necessary

Replace the inexpensive countertop, pull up the laminate flooring, and put in tile or hardwood, or buy that new refrigerator you wanted but couldn’t afford during the remodel. (Just make sure it fits in the space!)

By: Gretchen Roberts

If you are interested in buying or selling real estate in the Energy Corridor, please contact Connie Vallone with First Market Realty at 713 249 4177  or visit  or .