When you remodel a kitchen you think you are merely getting the benefit of a nicer kitchen. But people who are financially savvy will tell you that there are benefits beyond that. A kitchen remodel is an investment, one that you may be able to mitigate the cost of.

Here is the information you need to turn your dream kitchen remodel into a major tax deduction.

Understanding Tax Deductions and Home Improvements

To put it simply, tax deduction lowers the amount of taxes you have to pay by reducing your taxable income.

When you make home improvements you add value to your home, adapted for your uses, and prolong its life. In the eyes of the IRS these improvements enhance your property and may make it eligible for tax benefits so long as they add to the home’s value.

Generally speaking, making small repairs or doing general maintenance does not qualify for tax deduction, however larger remodels can.

Kitchen Remodels as Capital Improvements

A major improvement to your home, such as a kitchen remodel project, typically involves upgrades that will increase your property value, extended feasibility, we’re adapted for new purposes.

This is different than mere repairs which can address wear and tear, or updating fixtures. The IRS will usually classify a kitchen remodel as a capital improvement.

This is important because a capital improvement status means that even though you will not receive them and immediate tax deduction for the remodeling costs, you can use the expenses later on to reduce the capital gains tax owed when selling your home by raising the properties cost basis. 

Home Improvement Tax Deductions

In order to qualify your kitchen remodel project for tax deductions, the renovations have to significantly enhance your home’s value or repurpose it for a new use. Kitchen remodels may qualify for deductions if they are necessary for medical purposes, or if you are using your home for business purposes.

In any other scenario, the cost of the remodel is added to your home’s cost basis. This reflects an increased investment in your home, which can lower the capital gains tax if you ever sell the property.

IRS Tax Deduction Rules and Limits

It needs to be said that there are limits on home Improvement deductions. For example, home improvements must substantially boost the home’s value or adjust it in new uses to qualify.

As mentioned previously, the price and expenses for the improvements that exceed certain thresholds related to the homeowners adjusted gross income and be deductible under certain conditions, such as necessary medical modification or if a portion of the home is being used for business purposes. 

Medical-Related Home Improvements

Kitchen remodels can be classified as medical expenses if the remodel is designed to accommodate a household or family member’s medical condition, such as being confined to a wheelchair. A good example would be accessibility rails, similar to those found in bathroom remodels.

In order to qualify for such a deduction the homeowner must be able to prove that the remodel is necessary for medical purposes and not merely for aesthetic reasons. This will typically require obtaining a doctor’s note of recommendation and being able to establish a clear connection between the renovation and medical need.

The cost of these improvements may be fully or partially deductible if they do not increase the home’s value. Otherwise, the deductible amount is reduced by the increase in the home’s value

Rental Property Renovation Tax Deductions

The regulations for rental properties are different, as kitchen remodels can often be deducted. You need to understand the difference between a deductible repair expense and an improvement.

Repairs maintain the properties current condition, such as painting or fixing leaks and as such they are immediately deductible.

Home Office Deductions for Self-Employed Individuals

If you are self-employed then you can deduct a portion of your kitchen remodel as a home office expense, especially if the remodel directly benefits your home office area. The office must be the principal place of business and use regularly, and only for business activities.

The costs must also really be associated with the office portion of the home and detailed records need to be maintained in order to substantiate your expense.

Energy-Efficient Home Improvements

Your kitchen remodel may be eligible for tax credits if you are incorporating energy efficiency into its design. Such energy efficient improvements can include energy efficient refrigerators, dishwashers, and stoves. Sustainable materials for countertops and flooring that meets specific energy standards can also apply.

In order to receive these credits the improvements have to meet certain energy efficiency standards set by the government.

Financing Options and Tax Implications

If you require financing for your kitchen remodel, you should understand that various financing methods have different tax implications. For example, any interest paid on a home equity loan could be tax deductible if the loan is used to buy, build, or substantially improve your home.

Understanding the tax ramifications is critical for the homeowner because they can significantly affect the cost of the overall cost of the remodel.

Record Keeping and Documentation for Tax Purposes

If you are going to attempt to make any kind of substantial tax claim, then it is critical that you have documentation to substantiate your claim. This includes keeping track of all receipts for any money spent during the remodel.

You must also keep track of invoices, contracts, and before and after photos of the remodeled kitchen. This documentation will help establish the validity of any tax claims you make.

Professional Guidance on Kitchen Remodel Tax Deduction

One of the most important things that a homeowner should do when looking for tax benefits for their kitchen remodel is to consult a tax expert.

A tax expert can help you learn how to properly document the remodel process and how best to take advantage of any tax benefits available to you. They will also ensure that you have handled the remodel to the full letter of legality.

While it is possible to do without such services, it is something that is done at your own potential peril. It is a strong example of preferring to be safe than sorry.

Sources

Intuit TurboTax. (n.d.). Federal tax deductions for home renovation. Retrieved from https://turbotax.intuit.com/tax-tips/home-ownership/federal-tax-deductions-for-home-renovation-/L1Xgiv2gh

Kitchen and Bath Shop. (n.d.). Kitchen remodeling tax deductible. Retrieved from https://kitchenandbathshop.com/kitchen-remodeling-tax-deductible/

Jackson Hewitt Tax Service. (n.d.). Home improvement tax deductions. Retrieved from https://www.jacksonhewitt.com/tax-help/tax-tips-topics/real-estate/home-improvement-tax-deductions/

H&R Block. (n.d.). Home renovation tax credit. Retrieved from https://www.hrblock.com/tax-center/filing/credits/home-renovation-tax-credit/?srsltid=AfmBOooAZUVZDEqyMDpdE5-94dA970PjVXuCVexRyE5uxauyCoeNCRQs