Homeowners don’t often plan for home upgrade expenses. Old appliances break, and it’s necessary to replace them, even if your budget didn’t plan for it. Understanding how to fund and finance your home’s upgrades or repair expenses is a significant step as a homeowner because it helps you use your money wisely.
What Upgrades are a Priority?
Homeowners often have a list of upgrades for their home, whether it’s replacing the carpet with hardwood flooring or upgrading the furnace downstairs to a more energy-efficient model. As a homeowner, it’s essential to determine which upgrades are a priority.While hardwood flooring would be wonderful, if your furnace is nearing its average lifespan, it’s more of a priority to set aside funds for that upgrade rather than new flooring. One way to try to achieve both goals, however, is to have separate accounts — one for saving for home upgrades and the other for home repairs.Other home repairs or upgrades that should be a priority are ones related to your home’s structure or integrity, like the following features:- Roof
- Gutters
- Foundation
- Electrical wiring
- Heating and cooling system
- Plumbing
- Windows
What Home Improvements are Tax Deductible?
Everyone loves a tax deduction, which is why many new homeowners are curious about what home improvements are tax deductible. Deductions for improvements to your home vary. Please check with your tax professional for full details and direction on the below opportunities.You can earn a general home tax deduction, as well as tax benefit, through three methods:1. You sold your home.
Live in your home for two to five years, and you may qualify for this tax benefit. This benefit, also known as the home sale tax exclusion, prevents the taxation of part of the money from the sale of your home.How it works is the first $250,000 of profit from your home is tax-free, if you’re the sole owner. If you own it with your spouse, that amount rises to $500,000, but you must file your taxes together.So, say you sold your home for $350,000 and purchased it for $200,000. During your ownership, you invested $75,000 into home improvements. Combine your investments with your purchase price for a total of $275,000, and subtract it from the sale price — the difference is $75,000. Because $75,000 is less than $250,000 or $500,000, it’s tax-exempt.While not a tax deduction, this tax benefit is helpful when selling your home and also rewards you for investing into your property.2. You maintain a home office.
A home office is a yearly tax deduction. To qualify, you need to operate a business and use a portion of your home regularly as an office for your business. You can deduct home upgrade expenses for remodeling a room for your office, plus any improvements to your home.Improvements depreciate based on how much of your home is committed to an office. If your office takes up 10 percent of your home, then you’ll depreciate 10 percent of the cost of upgrading your toilet or electric wiring, even if these updates are outside of your home office.3. You rent your home.
Expenses for renting rooms are tax deductible. If you replace the carpeting in a tenant’s room, for example, or repair their window, it’s a tax-deductible home improvement. Other home expenses like utilities, insurance and trash removal you divide into similar percentages, like you do with your home office.If you rent 30 percent of your home, for instance, you deduct 30 percent of your expenses that you and renters share like utilities. You can also divide your home by the number of rooms in your house, so long as they’re similar sizes. So, if your house has six rooms and you rent two, then you deduct around 30 percent of your expenses.For most homeowners, only the home sale tax exclusion is a viable tax deduction. Depending on where your home upgrade expenses are going, though, you may be able to receive a tax credit. The following home items offer tax credits:- Metal or asphalt roof
- HVAC unit
- Insulation
- Water heaters
- Doors
- Windows
