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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Hefty remodeling bill won't bring big tax benefit
Tax Talk

Tax savings for home renovation

Dear Tax Talk:
We spent over $70,000 remodeling our home and adding an addition. Are any of these expenses tax deductible?
-- Lisa

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Dear Lisa,
Uncle Sam appreciates you keeping up your property, however, you're not going to get a tax break for the cost of it. In connection with the remodeling, you may have paid for a few items that are otherwise tax-favored.

If you took out a second mortgage on your home to pay for the cost of the improvements, the interest on that debt would be deductible. The interest would be deductible -- the same as the interest on your original mortgage, if any.

In 2007, you can again choose between claiming a deduction for your state and local income or sales tax. You would generally choose the larger of the two. If you believe your sales tax deduction will be greater, you can either choose to claim your actual sales tax paid on all purchases or a standard amount from a table plus the sales tax on major specified items.

The standard amount is an amount from IRS tables that takes into account the sales tax rate in your state, your income and family size. In addition to this amount, you can add on the sales tax on a major item such as a car or boat purchase and the sales tax on a major home renovation or addition. The sales tax on a major home addition/renovation is deductible if any of the following criteria apply.

Deductibility of sales tax on renovation:
Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation.
You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly.
Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly.

For example, if you paid $3,000 in sales tax relating to the improvements and you bought a car and paid $1,000 in sales tax on that, and the standard deduction for sales tax in your state based on your income and family size is $1,000, your total sales tax deduction for the year would be $5,000. The IRS provides a sales tax calculator for determining your deduction.

Certain energy saving property qualifies for a tax credit.

Bankrate.com's corrections policy -- Posted: Feb. 14, 2008
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