Thinking of selling your house in NY? If so, you’re probably wondering about the taxes when selling a home and if home improvements are tax deductible. Good question especially if you’ve invested in your home over the years. In this post, we’ll go over which home improvements are tax deductible when you sell your home in NY. We’ll keep it simple so you don’t need to be a tax expert to follow along.
Before we get started, if you want to sell your house fast without worrying about improvements or tax headaches there are cash home buyers in NY who can help. Companies like Leave The Key Homebuyers buy houses as-is which can be a great option if you’re in a rush or don’t want to deal with the hassle of improvements and their tax implications.
Home Improvements Tax Deductible When You Sell Your Home
When it comes to home improvements and taxes there’s good news and bad news. The bad news is most home improvements aren’t tax deductible in the year you do them. The good news is many improvements can help you save on taxes when you sell your home. How? By increasing your home’s “cost basis.”
It’s important to understand the difference between a tax deduction and other tax benefits. A tax deduction reduces the amount of your taxable income which reduces your overall tax liability.
Your home’s cost basis is what you paid for it plus the cost of certain improvements you’ve done over time. When you sell your house you subtract this cost basis from the sale price to figure out your profit (or “capital gain”). The higher your cost basis the lower your taxable profit will be.
Understanding the adjusted cost basis is key for homeowners. It’s the original purchase price of your home plus the cost of improvements you’ve done over time. This adjusted cost basis is what the Internal Revenue Service (IRS) uses to calculate your capital gains taxes when you sell your home.
Capital Improvements
Not all home improvements count towards your cost basis. The ones that do are called “capital improvements.” These are permanent additions or changes that increase your home’s value, adapt it to new uses, or extend its useful life.
Some examples of capital improvements include:
- Adding a new room
- Installing central air conditioning
- Upgrading the plumbing or electrical systems
- New windows
Capital improvement expenses can have a big impact on your tax situation when you sell your home. Unlike regular home repairs which maintain your home’s current condition, capital improvements add value to your property and can be added to your cost basis.
Keep good records of these improvements, including receipts and before-and-after photos. This will be important if the IRS ever audits your tax return.
New Roof
One of the biggest capital improvements you can make to your home is a new roof. This is a big project that adds a lot of value to your home and can be added to your cost basis. If you replaced your roof while you owned your home make sure to include this cost when you sell your home.
A new roof is a bigger home improvement project that not only protects your home but also adds value to it. The entire cost of a new roof can be added to your home’s cost basis which can reduce your capital gains taxes when you sell.
Energy Efficiency Upgrades
Energy efficient improvements are good for the environment and your utility bills but also provide tax benefits. While these improvements might not be deductible when you sell your home they can often be tax creditable in the year you do them. A tax credit reduces the amount of tax you owe or increases your tax refund whereas a tax deduction only reduces your taxable income.
Some energy-efficient upgrades that may be tax-creditable include:
- Solar panels
- Energy-efficient windows and doors
- Energy-efficient heating and cooling systems
- Insulation
- Geothermal heat pumps
- Energy-efficient water heaters
These energy-efficient home improvements will make your home more attractive to buyers and potentially increase its value which is a double win. Plus you may be eligible for federal tax credits for energy efficiency upgrades which can be tax benefits now.
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Landscaping Improvements
Believe it or not, some landscaping improvements can be capital improvements. If you’ve made significant changes to your property that increased its value these costs can be added to your home’s cost basis.
Examples of landscaping improvements that may be included are:
- New driveway
- Deck or patio
- Swimming pool
- Retaining walls
Remember regular maintenance like mowing the lawn or planting annual flowers doesn’t count. We’re talking about big changes that add value to your property.
Home Improvements for Medical Reasons
If you made improvements to your home for medical reasons you may be in luck. These improvements can be deductible as medical expenses in the year you do them and also added to your home’s cost basis when you sell.
Some examples of medically necessary home improvements include:
- Ramps for wheelchair access
- Widening doorways
- Handrails or grab bars
- Bathroom modifications for accessibility
To qualify these improvements must be medically necessary and not just for general comfort or convenience. The IRS allows deductions for these types of improvements as medical expenses which can reduce your taxable income in the year you do them.
Home Office Improvements
With more people working from home these days home office improvements are becoming more common. If you use part of your home exclusively for business you may be able to deduct some home office expenses each year. When you sell your home you may have to recapture some of those deductions but home office improvements can still be added to your overall cost basis.
Some home office improvements that may be included are:
- Built-in bookshelves or cabinets
- New flooring
- Upgrading the electrical system to support office equipment
- Separate entrance for clients
Remember the key is that these improvements must be for your home office area. Home office tax deductions can be complex so it’s always best to consult with a tax professional to make sure you’re following all the rules.
Non-Tax Deductible Home Improvements
While many home improvements help you tax-wise when you sell it’s important to know not all home-related expenses count. Generally, repairs and maintenance don’t qualify as capital improvements. These are costs to keep your home in good working condition but don’t add value or extend the life of your property.
Examples of non-tax deductible home expenses are:
- Painting interior or exterior
- Fixing leaky faucets
- Replacing broken windows
- Repairing a broken appliance
While these tasks are important for maintaining your home they won’t help reduce your tax burden when you sell. It’s important to know the difference between repairs and improvements to understand their tax implications.
Planning Home Improvements to Increase Value and Be Tax Deductible
When planning home improvements think about increasing your home’s value and tax benefits. Here are some tips:
- Improve for long-term value.
- Keep records of all improvements including receipts and before-and-after photos.
- Consider energy-efficient upgrades that may be eligible for immediate tax credits.
- If you’re selling soon prioritize improvements that will appeal to buyers in your area.
- For big projects consult with a tax professional to understand the tax implications.
Remember while tax benefits are nice they shouldn’t be the only factor in deciding what to improve. Improve what will make your home more comfortable and functional for you while you live there.
Capital Gains Tax
When you sell your home you may be subject to capital gains tax on the profit you make. But there are some important exceptions and rules to know:
- If you’ve lived in your home as your primary residence for at least 2 of the 5 years before selling you can exclude up to $250,000 of gain ($500,000 for married couples filing jointly).
- The profit above that is subject to capital gains tax.
- Your gain is calculated by subtracting your adjusted cost basis from the sale price of your home.
This is where all those capital improvements come into play. By increasing your adjusted cost basis you can potentially reduce your capital gains tax.
Rental Properties
If you’re selling a rental property the tax implications are different from selling your primary residence. Here are a few things to consider:
- The capital gains exclusion above doesn’t apply to rental properties.
- You may be able to deduct expenses related to renting the property including repairs and improvements in the years you incurred them.
- When you sell you’ll need to recapture depreciation which can impact your tax liability.
If you’ve been renting out part of your home or have a separate rental property it’s especially important to keep detailed records of all improvements and operating expenses.
Keeping Records
We can’t stress enough how important it is to keep good records of all your home improvement projects. This includes:
- Receipts for materials and labor
- Contracts with contractors
- Before and after photos
- Permits and inspection reports
These records will be critical if you ever need to prove the cost of your improvements to the IRS. They’ll also be helpful if you’re selling your home and want to show potential buyers the improvements you’ve made.
Home Seller Tax Breaks
We’ve focused on improvements but there are other tax breaks for home sellers:
- Mortgage interest: You can usually deduct the interest you’ve paid on your mortgage for the portion of the year you owned the home.
- Property taxes: These are generally deductible subject to limits.
- Selling costs: Real estate agent commissions, legal fees, and other costs associated with selling your home can usually be deducted from your gain.
Bottom Line
Selling your home in New York and figuring out which home improvements are tax deductible can be tricky but it’s worth the effort. Keep good records and make smart improvements and you can potentially reduce your tax bill when you sell.
Remember tax laws change and everyone’s situation is different. Always consult with a qualified tax professional for advice specific to your situation. They can help you navigate the home improvement tax deductions and make sure you’re taking advantage of all the tax breaks available to you.
If you’re feeling overwhelmed with making improvements and the tax implications remember there are other options. For those who need to ‘sell my house fast in Queens‘ or anywhere in New York companies like Leave The Key Homebuyers offer a simpler solution. We buy houses in Buffalo and all over New York State, we make it hassle-free to sell your home without having to worry about improvements or complex tax situations.
Whether you decide to make improvements or sell as-is the key is to make an informed decision that’s right for you. With the right information and preparation, you can sell your home in New York minimize your tax burden and maximize your profit.
