When you start thinking about a home addition, part of the planning process is juggling numbers. How big should the addition be? Will it be more expensive to build up or build out? How much time will it take? Is it better to build an addition or simply buy a new house? Perhaps we should simply remodel the existing house instead of adding on. Will I get the investment back when I sell the home? Most importantly — how much will this cost?
You might not realize that some home addition costs can give you tax advantages. Here’s what you should know about home additions and tax deductions.
Home Additions and Tax Deductions — What You Need to Know
You Can Write Off Building a Home Office
If you’ve been dreaming about adding on a brand-new home office, you’ll be even more motivated to do so once you realize that expenses associated with a home office are deductible as business expenses.
Now, keep in mind that the IRS has some very specific rules about what’s considered a true home office. You can’t build a guest suite for Nana to stay in over the holidays and call it your home office. It must be a space that you regularly and exclusively use to conduct business. It also needs to be a place where you conduct a substantial amount of your business. If you’re an employee, you can also deduct your home office as long as your business is “for the convenience of your employer” and you don’t rent any part of your home to your employer. For more information, view the IRS’s Publication 587 to learn about the requirements and what kind of expenses you can deduct.
Go Solar to Take Advantage of Deductions
While many credits for energy-efficient home building expired in 2016, the biggest deduction still available is for installing solar panels and solar hot water heaters. It extends through 2019 and can cover as much as 30 percent of the cost associated with purchasing and installing a solar panel system on your home addition. When it comes to home additions and tax deductions, there aren’t many more expenses you can claim, but you can check with your local utility companies to see if they’ll issue credits if you purchase energy-efficient electronics, appliances, heating and cooling equipment, or other building products.
Rent Out and Depreciate the Cost
Many of the most lucrative strategies around home additions and tax deductions come when you use your home as a business. This also applies if you rent out a portion of the home. If you improve your home, you can depreciate the cost of the improvement over several years. (Repairs can be deducted as a business expense, while an improvement must be depreciated over the course of its useful life.) Are you thinking of finishing out that space above the garage and turning it into a bedroom and bath? If so, why not rent it out? You’ll be able to generate passive rental income and score tax advantages to defray the costs.
Remodeling for Medical Reasons Is Deductible
It’s also important to know that if you or a loved one has a medical condition or disability that requires modification to your home, those costs are deductible as medical expenses. This includes things like building a wheelchair ramp, widening doorways, or adding in a handicapped-accessible shower. To be considered for a tax deduction, these expenses must be specific to a medical condition and not related to improving the value of the home.