The Tax Advantages of a New Kitchen and Bath
Tax day is around the corner and many will be submitting tax returns, if they haven’t already. There are several tax advantages of being a homeowner and making improvements to your home.
The amount Americans pay is based on the income they earn from their jobs, investments and other sources less deductions and credits. The most common tax credits for homeowners are a first-time homebuyer credit and expenses for childcare and home offices. A $1,000 tax credit will save you that much in taxes.
By comparison, a tax deduction lowers taxable income to amount equal to your marginal tax bracket. If you are in the 28% federal income tax bracket and you are entitled to a $1,000 tax deduction, your tax bill would be reduced by $280 (0.28 x $1,000 = $280).
Renovating an existing kitchen or bath may not provide immediate tax benefits, because those expenses are not deductible. However, they are factored into the value of your home when it’s sold. When a home is sold, the IRS requires sellers to pay taxes on the difference in the original price owners paid for the home and the sale price of the home. The amount of tax you pay depends on how long you have owned the home and if you’re single or married and file a joint return.
If you owned the home for five years and lived in it as your principal residence for two of the five years, you can exclude $250,000 of the profit from taxes if you are single and $500,000 in profit from taxes if you are married filing a joint return. Any amount of profit exceeding the $250,000 or $500,000 threshold is taxed as a capital gain. However, improvements you have made to your home that increase the home’s value substantially while you have owned it can reduce your tax exposure even more.
If you purchased your home in 1980 for $200,000, spent $50,000 renovating your kitchen in 2005 and $30,000 renovating your master bath in 2010, then the basis of your original purchase price for tax purposes would be $280,000. If you sold the home for $900,000 in 2016, the profit on your home would be $900,000 – $280,000 = $620,000. If you are married and filing a joint return, you would have to pay long-term capital gains tax on $120,000 of profit. IRS will only allow you to increase the cost basis of our home if the improvement adds substantial value such as new kitchens and bathrooms, additional rooms, new roofs, etc. Check with your tax professional to determine which improvements would help raise the base of your home.
Additional benefits of owning a home and making improvements to it include the ability to deduct the interest you pay on both original mortgages and home improvement loans (or equity lines of credit). Real estate taxes also are deductible.
When you are considering a new kitchen or bath, do not overlook the potential tax benefits associated with making substantial improvements to your home or the ability to deduct interest on a home improvement loan. We would welcome the opportunity to show you how to make your dreams a reality by giving us a call at 216.245.4522 or visiting our showroom at 26050 Richmond Road in Bedford Heights. Please note, we don’t claim expert status on taxes, so be sure to consult a qualified tax expert before taking any action based on what you read here.