Home Improvement Loan: Tax Deductions for Home Improvements

Home improvements, like renovating a home or making permanent additions to the home, increase the value of the house while making it more habitable. Home improvement loans, availed for the purpose of making certain improvements, qualify for tax deductions. In addition to these loans, certain expenses also qualify for tax deductions and tax credits. A tax deduction reduces the amount of taxable income. A tax credit, on the other hand, reduces the actual amount of tax that a person has to pay. Hence, a tax credit is better than a tax deduction since the former reduces the actual tax liability.

Tax Deductions for Home Improvements - Home Improvement Tax Deductions

Interest and Points on Home Improvement Loans: Interest paid, on a home equity loan or a home equity line of credit availed for the purpose of making capital improvements on the home, are fully tax deductible. Capital improvements are those that increase the worth of the home, prolong its depreciable life or adapt it to new uses. Points purchased for obtaining a home improvement loan, at a favorable rate of interest, are also fully tax deductible provided the following conditions are met:

• The loan or the line of credit is secured by the main home
• Points purchased are in accordance with the established practice of buying points
• Points purchased were not more than the points usually paid for availing such loans
• The tax payer uses the tax method of accounting

Expenses on Home Improvements on account of Medical Reasons: Medical expenses, that one pays for oneself, one's spouse and dependents, qualify for tax deductions. Home improvements, that have been undertaken for medical reasons, also qualify as medical expenses and are thus tax deductible. For instance, people suffering from heart ailments can install an elevator in the house, to avoid climbing the stairs, and can claim a tax deduction citing medical reasons. Improving the home’s air filtration system by installing central air-conditioning or removing a drywall that may be damp and moldy can help abate the symptoms of asthma in people experiencing breathing difficulty. The doctor may have to provide a letter stating the necessity of making these improvements. All reasonable costs, incurred to accommodate a handicapped individual, qualify for deductions. Constructing entrance and exit ramps for the home and widening the doorway at the entrance and the exit to the home in order to help handicapped people living in the home; installing railings and support bars along stairway and in the bathroom; modifying the kitchen to make it easily accessible to people with disabilities; modifying electric outlets and fixtures; installing lifts and leveling the ground are some of the capital expenses that are deductible.

Expenses for home improvement - Increase in the value of the home because of improvements = Amount that qualifies for a tax deduction

In addition to tax deductions for home improvements, the government is also giving tax credits for making the home environment friendly. ENERGY STAR was initiated as a voluntary labeling program in 1992, by the United States Environmental Protection Agency, to identify and promote energy efficient products in order to reduce energy consumption and greenhouse gas emission. A number of new homes qualify as ENERGY STAR homes since the appliances used in these homes bear the ENERGY STAR label.