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An Interest in Home Improvement Could Save You Interest
December 3, 2016
No matter if you’ve lived in your home for six months or 60 years, many of us will always see places where there is room for improvement – a larger kitchen, better landscaping, adding another bedroom, etc. If you have an eye for design and an interest in home improvement, you could be saving money on your taxes.
In many cases, interest on a home improvement loan can be written off as a tax deduction at the end of the year. To be clear, it’s only the interest that is tax deductible – not the cost of the improvements themselves. However, that still adds up to a significant amount of savings.
To qualify to receive the home improvement loan interest tax deduction, you must:
Be legally liable to repay the loan
Be actively making payments on the loan
Not exceed $1 million in acquisition debt
Another caveat is that the loan must be for “capital improvements” to the home, not routine repairs, maintenance, and fixes. In both cases, many people find it necessary (or at least financially beneficial) to take out a loan for both capital improvements or repairs around the house; however, the IRS does distinguish between the two types of work.
To qualify as a capital improvement, the work must increase the value of your home, adapt your home to new uses, or extend the life of your home. Some examples of qualifying capital improvements include installing insulation, adding another bedroom, building a garage, improving the landscaping, and more.
On the flip side, loans taken out for repairs do not qualify for interest deduction. Some examples of home repairs that do not qualify include fixing broken windows, replacing cracked tiles, painting and plastering, and more.
Determining when work on your home constitutes a capital improvement vs. a repair can be tricky so when in doubt be sure to check with a tax consultant.