Home improvements can provide shield from taxes

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A home probably is the biggest investment a person will ever make. And, in many ways, it's an investment that will bring rewards. For one thing, most homes tend to appreciate over time. Furthemore, a house can provide always-needed tax benefits.|ret||ret||tab|

Of course, mortgage interest is tax-deductible. But home improvements, under some circumstances, can also help at tax time.|ret||ret||tab|

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Paying for improvements|ret||ret||tab|

The clearest tax benefits resulting from home improvements can be achieved through a home-equity loan used to pay for improvements. |ret||ret||tab|

Homeowners can generally get this type of loan at a competitive rate, and, more importantly, the interest on the loan may be tax-deductible. |ret||ret||tab|

Keep in mind, however, that when taking out a home-equity loan, the house is pledged as collateral. That's why homeowners have to be sure they can afford the loan payments.|ret||ret||tab|

Without a home-equity loan to pay for home improvements, are the improvements still tax-deductible? They could be. |ret||ret||tab|

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Home-based business|ret||ret||tab|

If the homeowner has a business in the home, or if part of the house is rented out, then part of the home improvements may be considered business expenses, and deductable through depreciation. Home-owners need to be cautious, however, about what they claim the Internal Revenue Service may have different definitions of "business expenses." A tax adviser can help make the right decisions.|ret||ret||tab|

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Capital gains |ret||ret||tab|

If there is no home-based business or renters then home improvements are typically not tax-deductible. But they can help from a capital gains standpoint.|ret||ret||tab|

Basically, capital gain is the difference between the house's "cost basis" its value at the time of purchase and the price at which it was resold. |ret||ret||tab|

So, if the home was bought for $100,000 and resold for $300,000, there would be a capital gain of $200,000. But home improvements can add to the cost basis of the home.|ret||ret||tab|

Suppose a deck, outdoor lights and a sunroom were added and the kitchen was modernized. Together, these improvements increased the cost basis of your home to $200,000. |ret||ret||tab|

Now, if the house were to sell for $300,000, there would only be a $100,000 capital gain half of what it was before the home improvements.|ret||ret||tab|

Actually, either capital gain $100,000 or $200,000 might be irrelevant, because homeowners can generally exclude up to $500,000 of capital gains on a house sale, as long as they're part of a married couple filing jointly. |ret||ret||tab|

Single filers can exclude $250,000. (To qualify for this exclusion, homeowners must have used the home as a principal residence at least two out of the five years preceding the sale.)|ret||ret||tab|

Given these high exclusion figures, is it even worthwhile to think about the impact of out-of-pocket home improvements on your tax situation? Yes. If a homeowner stays in a house for a very long time and lives in an area in which housing prices steadily go up, then the homeowner may someday find themselves bumping up against the capital gains limits. If that happens, the homeowner will be glad he invested in the garage, gazebo, patio and porch.|ret||ret||tab|

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