Any home improvements go towards your cost basis when it’s time to sell your home. Home improvements are considered anything you’ve done to your home such as adding energy efficient appliances, a beautiful wooden fence in the backyard, landscaping, or a new room.
These expenses cannot be deducted at that time. Keep all your receipts and paperwork to use once you are ready to sell. The IRS can and does switch things up. Many profits from home sales are tax-free, but they can come after you and demand a part of the sale profits.
Energy Efficient Tax Credit
Congress passes laws every once-in-a-while to help Americans save the planet. These are typically energy efficient tax credits where homeowners receive credit for making their home more energy efficient. The tax credit helps to offset these expenses. Two credits include the Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit.
Some examples of what you can do to earn these credits include:
- Solar powered water heaters
- Exterior doors
- Particular roofing materials
- Central air conditioning systems
- Electric heat pumps
You cannot just make your entire home energy efficient, installing whatever you want, and expect full credit for everything you’ve done. The cost of installing these home improvements is not to be counted as part of your credit.
Some have a lifetime limit of $500. If you installed energy efficient windows, you are only allowed a credit of $200. As of today, there is a 30-percent credit available for the cost of solar, geothermal and wind energy generating systems. These credits must be filed using Form 5695 – Residential Energy Credit.
Tax-Free Profit on Sale
Homeowners have another benefit of owning real estate instead of just having a peace of mind. You can also shelter some profit if particular criteria are met. You could shelter up to $250,000 of profit tax-free if a single person had lived in the home as their primary residence for two of the five years before they sold the home.
Those married filing jointly can shelter up to $500,000 but have two criteria to be met.
- One of the spouses had to have owned the home as their primary home for two of the five years before they sold the home.
- Both spouses had to have lived in the home as their primary residence for two of the five years before they sold the home.
Please note, that in all of the above situations, if you sold the home for a loss, you can’t deduct it.
You can use these exclusions each time you sell a home you’ve lived in for two of the five years before you sell it. However, any gains over the limits of $250,000/$500,000, must be reported as a capital gain on Schedule D.
Wrap Up of Tax Breaks for Buying a Home