Massachusetts Real Estate

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Home Improvement Tax Deductions

                                                                                                                                                             Tax break home improvement

Original article source: Massachusetts Real Estate Blog ~ Tax breaks on home improvements

There is no question that there are far less people today that have the kind of equity in their home that they did five to ten years ago. In most areas across the country Real Estate values have dropped by a substantial margin decreasing the amount of folks who have capital gains concerns.

One of the great benefits of home ownership has been the fact that equity growth to an extent does not always get taxed.

A very important capital gains tax law went into effect in 1997 and is known as the Taxpayer Relief Act of 1997.

The current Real Estate capital gains tax law when selling your personal residence allows for an exclusion of up to $250,000 in profit if you are single and $500,000 if you are married. In order to be eligible for the tax exclusion you must have lived in your home for two of the last five years. The home must also be your personal residence and can not be considered an investment property.

If you move often or do not have substantial equity in your property then tax breaks on home improvements are not going to be much of a concern.

For those that are fortunate enough to have lived in their home for a long period of time and have built up a sizable equity position, there is good reason to keep track of what you have spent on home improvements.

By keeping track of the home improvements that have taken place in your property you are able to increase the cost basis which will decrease the amount of taxes you pay when it comes time to sell.

How do home improvement tax breaks work?

In order to figure out how to calculate your tax break from home improvements  you are going to need to figure out what your initial cost basis was when you 1st purchased your home.

This will be what you actually paid plus any closing costs such as attorney fees, transfer taxes, surveys, commissions or any inspection related charges.

You will then need to figure out all the home improvements you have made to your home since the purchase. As an example lets say you purchased your home for $400,000 including all the closing cost expenses.

Lets further assume you also have $50,000 in home improvements since you purchased including a new bath room, a finished basement, a large deck and brick patio. if you add the purchase price and improvement costs together you get an adjusted basis of $450,000.

                                                                                                                                                             Saving on taxes home improvement

Going back to the qualifications of the capital gains tax law for Real Estate outlined above, lets assume you have met the litmus test and have lived in the home for two out of the last five years as your primary residence.

You find out you are going to be moving out of the area you are located in and sell your home for $700,000.  If you are single the tax law says you can exclude up to $250,000 in profit or gain.  Using the $700,000 sale price minus the adjusted cost basis of $450,000. You would not pay any taxes on the sale.

Here is where the tax breaks on home improvements come in. If you had not kept track of what you spent making your home better you would be paying taxes on $50,000 because that would be become what is considered profit to the IRS.

By keeping receipts on the home improvement dollars you have invested you will save $7500 0n your taxes! As of this writing the current capital gains tax rate is 15%. $50,000 x 15% = $7500. This is obviously a nice chunk of change to save just by being a little studious.

What counts as a home improvement for tax purposes?

When calculating tax breaks the one thing you don't want to do is fool around with the IRS. While you may consider every dollar you spend on your home an improvement the IRS certainly does NOT! As a matter of fact most Realtors or buyers won't either. See home improvements with the worst ROI.

According to the IRS an improvement increases the value of your home while a non-eligible repair just returns something back to it's original condition. The IRS further states that a capital improvement has to last for more than one year, add value to your home or prolong it's life.

Home improvements must also be there when you sell your home as well. For example if you spent money putting tile flooring down in your kitchen fifteen years ago and then five years ago put in new hardwood floors you can't claim both as improvements.

It is important to note that repairs do not count as improvements. Again according to the IRS, repairs are things that are done to keep up a homes condition without adding value or prolonging it's life. There are real slight differences in comparing an improvement to a repair. An example of a repair would be fixing a window pain. An improvement would be replacing a window. 

If you are unsure on whether an improvement you have made to your home can be counted or not I would recommend speaking to a qualified tax professional or look at page 9 of publication 523 which details tax issues when selling a home.

Other Real Estate articles worth a look:

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About the Author: The above Real Estate information on home improvement tax deductions was provided by BillRE/MAX Executive Realty Metrowest Massachusetts Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356.

Have a home to sell in Metrowest Mass? I have a passion for Real Estate and love to share my marketing expertise!

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I service Real Estate sales in the following towns in and around Metrowest Massachusetts: Hopkinton, Milford, Upton, Bellingham, Southboro, Westboro, Ashland, Holliston, Mendon, Northboro, Shrewsbury, Hopedale, Medway, Grafton, Northbridge, Uxbridge, Franklin, Framingham, Natick and Douglas MA.

 

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Comment balloon 18 commentsBill Gassett • November 23 2010 08:17AM

Comments

Great information for the home seller and home buyer to keep track of the existing home or new home.

Posted by Dawn Crawley, Find Pinehurst Homes (Dawn Crawley Realty) almost 8 years ago

Thank You Bill for the valuable  information. Very good post.

Cheers

Nor Yeretsian

Posted by Nor Yeretsian, Envoy Capitol Realty Inc., Brokerage Toronto (Envoy Capitol Realty Inc.) almost 8 years ago

Welcome back Bill!  Glad to see you back in the rain and what a fabulous post with information for sellers these days.  I think more and sellers are looking at their home improvements this way in a lot of markets.

Posted by Lee & Pamela St. Peter, Making Connections to Success in Real Estate (Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522) almost 8 years ago

Bill- It is so important for homeowners to document their home improvements, it might surprise a seller as to how much they have spent and when you have built up a fair amount of equity you definitely want to take advantage of the capital gains tax law.

Posted by Peggy Dowcett, 978.302.3988, Concord, MA - Mass Real Estate (Coldwell Banker Residential Brokerage) almost 8 years ago

Bill - You've written a text-book primer on capital gains.  I can't wait until I can start dealing with these issues again :)  I also liked your linked post on the worst improvements for ROI, like a roof, which most people don't realize.  Suggested!

Posted by Wendy Rulnick, "It's Wendy... It's Sold!" (Rulnick Realty, Inc.) almost 8 years ago

Bill that is a lot of good information, and very well explained.  That was a huge saving in your example.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 8 years ago

Bill, some good information. I do keep all my receipts for improvements to our home and of course our rental property.

Posted by Rebecca Gaujot, Realtor®, Lewisburg WV, the go to agent for all real estate (Vision Quest Realty, Martha Hilton, Broker) almost 8 years ago

Bill... some excellent info... especially the part about what you might consider an improvement that the IRS considers otherwise... this is extremely important. Again, excellent job here,.

jeff belonger

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 8 years ago

Hi Bill -- Meaty stuff here and you laid it out very well and made it understandable.  Good record keeping is a must.  In Greater Cleveland where appreciation never matched the rest of the country, I have yet to run across a seller in the past 10 years who would have had any taxable gain, but I bet some long term owners in more major/healthier markets would.

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) almost 8 years ago

Thanks everyone for all your comments on my article about home improvement tax deductions. Hopefully at some point there will be a lot more folks that have to worry about this:)

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 8 years ago

Bill-Great post about home improvement tax deductions, Have a great Thanksgiving!

Posted by Joseph D. Federico, Eastern Massachusetts Real Estate (Donahue Real Estate Co.) almost 8 years ago

Bill--This is an excellent post and absolutely correct, at least from my point of view. When I conduct a closing representing the Buyer (and often the Lender), I present the Buyer with a large three ring binded that contains the HUD-1 Settlement Statement and a copy of their Owner's Policy of Title Insurance. I then instrcut the Buyer to make a copy of each and every invoice they have which in any way concerns the home, and place same in their notebook. When they go to sell, they give you the Notebook so you have the information to develop an accurate marketing piece and they then give the notebook to their accountant so he or she can develop what items can be added to the tax basis.

Posted by Elliott S. Topkins, Massachusetts Real Estate and Title Atty (Topkins & Bevans-etopkins@topbev.com) almost 8 years ago

Billl this was a very well written post. So happy that I didn't miss it. Also going to check out your blog on home improvements with the worst ROI. Happy Thanksgiving to you and your family. Great post.

Posted by Lanre-"THE REAL ESTATE FARMER" Folayan, I don't make promises.I deliver results.SOLD HOMES (Keller Williams Select Realtors-Buy a home in Washington DC. Sell a home in Washington DC) almost 8 years ago

Bill, wanted to stop back over and say Happiest Thanksgiving wishes to you and your family!

Posted by Lee & Pamela St. Peter, Making Connections to Success in Real Estate (Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522) almost 8 years ago

Wecome back Interesting information and you included a caveat to discuss it with a rax professional  Happy Thanksgiving

Posted by Karen Kruschka, - "My Experience Isn't Expensive - It's PRICELESS" (RE/MAX Executives) almost 8 years ago

Bill - This is good information, and I believe that any time you get a chance to save a tax dollar, it probably improves the economy.

Posted by Larry Brewer - Benchmark Realty llc (Benchmark Realty LLc) almost 8 years ago

Excellent post to pass on.  Thanks so much. Bill, for the excellent onformation. Great detail.  Noting that repairs do not count is important because so oftern repairs and improvements are viewed together even though you had to repair first and then remodel-so then you must separate

Posted by Barbara Chatterton, Greater Madison Wisconsin Area Realtor (The Stark Company Realtors, Madison WI) almost 8 years ago

Bill - This is an excellent post about capital gains and provides some great information on a subject that many people should be aware of.

Posted by Donna Bigda, Greater New Haven CT Real Estate (RE/MAX Alliance) almost 8 years ago

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