How a Kitchen Remodel Can Slash Your Tax Bill
After spending thousands of dollars to renovate her outdated kitchen, Julie was pleasantly surprised to discover she could deduct a portion of the costs on her tax return. By taking advantage of deductions and tax credits for home improvements, she ended up slashing her tax bill and putting those savings towards even more renovations. With strategic planning, you too could see major tax savings from your dream kitchen overhaul.
Read on to find out how a kitchen upgrade could end up practically paying for itself!
Which Kitchen Remodel Expenses are Tax Deductible?
With a kitchen remodel involving everything from demolition to new appliances, what actually counts as a deductible expense? Here are the main categories to keep in mind.
Capital Improvements
Expenses for capital improvements made to your home qualify for tax deductions. The IRS defines a capital improvement as a permanent upgrade or addition that increases your home's value and extends its useful life. Common kitchen remodel projects like installing new cabinets, countertops, flooring, walls, or relocated plumbing are typically considered capital improvements.
Itemized Deductions
To claim any home improvement deductions, you must itemize your tax return using Schedule A. As you tally up your expenses for the kitchen remodel, portions of the project qualifying as capital improvements can be included with your other itemized deductions like mortgage interest and medical expenses. Just make sure you keep detailed receipts.
Depreciation of Improvements
Instead of deducting the entire cost of capital improvements in one year, the IRS allows you to deduct portions of those costs over several years according to depreciation schedules. The percentage you can deduct each year, and the number of years allowed, depends on whether the remodel is in a residential rental property or your personal home.
Non-Qualifying Cosmetic Upgrades
Purely cosmetic upgrades like installing new cabinets, paint, tile backsplashes, or lighting fixtures do not count as capital improvements, so cannot be deducted. But remember, expenses for structural changes behind those cosmetic details often do qualify.
Strategizing Your Kitchen Remodel Deductions
To maximize potential tax savings from your kitchen overhaul, here are some savvy strategies to consider:
Home Office Deduction
If you operate a home business, a portion of the kitchen remodel could potentially qualify as a home office deduction. However, to take this deduction the kitchen space would need to be used regularly and exclusively for your business. Having any personal or family use of the kitchen likely disqualifies this deduction.
Receipts and Documentation
Meticulous record keeping is key to justify the deductions claimed for your remodel. Keep receipts for all expenses, before and after photos documenting the project, and copies of contractor invoices and agreements. If audited, thorough documentation helps verify the legitimacy of the deductions claimed.
Cost Segregation Study
A cost segregation study allows you to reclassify certain assets in your remodel to maximize depreciation deductions. By frontloading more depreciation deductions in earlier years, you can reduce your tax bill in the years immediately following the reno. An experienced tax professional can determine if this study would benefit your specific project.
Amortization of Remodel Costs
You can spread capital improvement deductions over a set number of years through amortization, helping avoid spikes in your tax bill. A tax professional can advise the optimal amortization schedule to align deductions with your income and minimize your tax liability.
Tax Credits and Incentives to Consider
Beyond deductions, also look into these potential tax credits and rebates:
Energy Efficient Upgrades
Replacing old appliances with new ENERGY STAR models may qualify you for tax credits. There are also credits available for upgrading to an energy-efficient water heater, adding more efficient windows or insulation.
Small Business Deductions
If you claim a home office deduction, a portion of the kitchen remodel may qualify as a small business expense. Discuss with your accountant to deduct the maximum from your business income.
Federal/State/Local Incentives
Check databases like DSIRE for federal, state, utility, and local rebates and incentives available. For example, some areas offer rebates when buying energy- and water-efficient kitchen appliances.
Frequently Asked Questions
How long can I deduct kitchen remodel costs?
You can deduct capital improvement costs over a period of several years, as determined by the IRS depreciation schedules. For a personal home, the deduction period is usually 20 to 30 years based on the structure components.
What records do I need to provide the IRS?
Keep all invoices, bank/credit statements, contractor agreements, before/after photos of the remodel, and lists of expenses with receipts. This documents the work performed and verifies deductible costs.
Can I deduct a kitchen remodel in a rental property?
Yes, kitchen remodels in residential rental properties also qualify for capital improvement deductions, usually with shorter depreciation schedules allowing faster write-offs.
What percentage of costs can I deduct each year?
The annual deduction percentage depends on IRS tables. For example, cabinets are deducted at 5% per year over 20 years. Check with an accountant to maximize annual deductions.
With strategic planning and documentation, portions of your dream kitchen overhaul could be deducted over time, providing substantial tax savings. Work with a tax professional to leverage itemized deductions, depreciation schedules, and tax credits to maximize your potential refund. Just be sure to keep meticulous records throughout the renovation to substantiate all deductions claimed.
A kitchen remodel allows you to not only update your home but also potentially update your tax return. So take advantage of every deduction and credit available to help reduce the overall cost and start enjoying your new space even sooner!