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The conventional wisdom is that when you remodel your home, whatever you do, for the love of all that is sacred, save your receipts. And this is not a “save them until tax time” recommendation; it’s a “save them until you sell the place” mandate! The money you invest into improving your home over time gets added to your purchase price, or cost basis, when you sell, bringing down the amount the IRS considers to be profit or gain and reducing your chances of incurring capital gains tax. (Single homeowners can realize $250,000 of “gains” above the cost basis of their home tax-free; married couples, $500,000.) This is no surprise to most homeowners.
Here’s where many homeowners go wrong: Remodeling projects can trigger local and state tax credits. This is especially true for home improvements that increase your home’s energy efficiency, from low-flow toilets and showerheads to dual-paned windows and insulation, even solar systems and tankless water heaters. If you’re remodeling and improving your home’s energy efficiencyat the same time, visit your state, county, and city websites to see what tax credits or other financial incentives you might qualify for. If you use a home equity credit line to finance your improvements (whether or not they are ecofriendly), chances are, you can deduct the interest from that loan (up to $100,000) on top of your home mortgage interest deduction. Again, don’t forget to mention this to your tax professional.
