Summer is upon us, and that means both homeowners and real estate investors will be looking to knock a few renovation projects off of their list. However, as I am sure you are aware, not all summer renovations are created equal. As it turns out, some projects are much more capable of providing a great return on your investment than others. For what it’s worth, Remodeling.com’s Cost Vs. Value Report has identified the most popular remodeling projects, at least as they pertain to retaining value at the time of resale. In other words, they claim to know which projects will benefit the owner the most when it comes time to sell.
However, what if I told you summer renovations can contribute to your bottom line in more than one way? (Not just when trying to appeal to folks buying a home in summer.) Perhaps even more importantly, that the right energy efficient home improvements can save you money two-fold: tax credits and energy bills.
The benefits associated with summer renovations are not confined to the time of sale. In fact, there is another time in which the right improvements can return even more than originally anticipated: tax time. That’s right, it is entirely possible to make tax-conscious improvements to your home that both improve it’s value and ease your tax burden come April. That said, you may want to align your summer renovations with some great tax deductions. That way the repairs you make to your home will help you this summer and in April.
It is important to note, however, that the Internal Revenue Service (IRS) has a very clear definition as to what counts as a repair and what counts as an improvement. That said, it is in your best interest to be able to make the distinction yourself. In the event you decide to fix or replace something this summer, you need to be able to clearly identify whether it is an improvement or a repair for tax purposes.
But why is being able to make this distinction so important?
The answer is relatively simple: whereas repairs can be deducted from your taxes in the year they are carried out, improvements must be depreciated over the course of as many as 27.5 years. In order to make the appropriate deductions come tax time, it is important that you can differentiate between an improvement and a repair.
Not surprisingly, the IRS has made differentiating the two more of an ambiguous endeavor than it needs to be. If you would like their specific definition, please feel free to visit their website. However, I will attempt to outline the requirements of each below, and suggest a few home improvements you may want to consider this summer.
By definition, under IRS regulations, a property repair is an activity that keeps your home in good condition, but does not make it substantially better than it was before. Regardless of how much they cost, however, repairs are deductible in the year they are made to the subject property. For some of the best deductible repairs to make this summer, please refer to the following:
Summer Renovations & Tax Deductions Go Hand-In-Hand
Replacing Or Fixing Broken Windows
I want to encourage homeowners and investors alike to replace broken windows this summer, as the cost can be deducted from your taxes in the same year it was incurred. What’s more, fixing windows in the summer time has become synonymous with more than simple tax deductions; they can simultaneously reduce cooling costs and make a home more comfortable over the course of a sweltering summer.
The right windows will be able to regulate a home’s temperature and can very easily reduce energy bills. According to ENERGY STAR, “replacing old windows with ENERGY STAR certified windows lowers household energy bills by an average of 12 percent nationwide.”
If the windows in your home don’t need replacing, but instead could use a little TLC, you may want to consider making a few repairs, which are again tax deductible in the same year. According to energy.gov, “you can improve the energy efficiency of existing windows by adding storm windows, caulking and weatherstripping, and using window treatments or coverings.”
“Adding storm windows can reduce air leakage and improve comfort. Caulking and weatherstripping can reduce air leakage around windows. Use caulk for stationary cracks, gaps, or joints less than one-quarter-inch wide, and weatherstripping for building components that move, such as doors and operable windows. Window treatments or coverings can reduce heat loss in the winter and heat gain in the summer,” says the energy conscious site.
Fixing Gutters While The Weather Permits
Summer is a great time to work on renovation projects that will reward you at tax time. However, I also like to use summer as a time to prep for the upcoming months, specifically October though April. If for nothing else, it’s easier to work on a home when the weather permits. Now is essentially the best time to prep for harsher weather. Take this time to make any necessary improvements to your rain gutters, as you will certainly be glad you did when the rain starts coming later in the year. While you may not see immediate returns, you will be able to write the repairs off in April and protect your home from torrential downpours at the same time.
Green Summer Renovation Tax Credits
To this day, summer renovations that comply with “green” requirements are some of the best deductible expenses you can make come tax time. For what it’s worth, installing qualified energy efficient systems will allow homeowners to drastically lower their tax burden in April. That said, consider going green this summer to save money on your next tax season.
According to Intuit, the braintrust that we have to thank for TurboTax, “you can get a one-time federal tax credit of 30% of the cost of qualifying geothermal heat pumps, solar water heaters, solar panels, small wind turbines, or fuel cells placed in service for an existing or new construction home through December 31, 2016.”
What’s more, the investors with multiple properties will find that green tax deductions can be applied to each of their properties. Outside of fuel cells, which must be installed on your primary property for tax purposes, investors can take advantage of green tax deductions on vacation homes.
“The 30% credit applies to the cost, including labor and installation, and there is no maximum limit (except for fuel cells). For example, if you purchase and install a small wind turbine for $10,000, you get a $3,000 tax credit right off the bat – not counting the future savings on your electric bill,” says Intuit’s site.
Though not technically a repair, this particular tax credit must be used in the same year the item was installed. Be sure to keep the Manufacturer Certification Statement, as you will need it yo qualify for the credit come April.
It is time that we stopped looking at summer renovation projects in one dimension. For decades we have known how beneficial they can be to a subject property and its value, but their value can extend far beyond the actual price of a home. Summer renovations that coincide with tax deductions can help homeowners and investors two-fold.