Homeowners making improvements to their primary residences, second homes and rental properties should always keep good records and be prepared to share them with their tax professionals.
Doing so can potentially save homeowners money and keep them in good stead with the Internal Revenue Service and the state, said Joseph Gleba, partner-in-charge of the McHenry office of Porte Brown Certified Public Accountants.
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"Record retention is always important when making improvements to building properties because you can use those receipts to demonstrate your investment in the property and to reduce a potential capital gain at the time of the sale," said Gleba, who is also a certified construction industry financial professional for Porte Brown.
Many homeowners are only aware that they can deduct mortgage interest and real estate taxes on their annual returns. Those important deductions can be declared on up to two residences, according to Gleba. However, there are other tax factors that also can come into play.
For instance, the federal government is still offering tax credits to homeowners who have invested in energy-efficient measures for their residences such as certain windows, doors, insulation systems, metal roofs, furnaces, air conditioners and so forth. Such credits are limited, however, and if you have already taken credits (since 2005), you might be limited on the available tax credit.
Larger credits are available for more major investments like small wind energy, geothermal heat pump, solar electric, solar water heating and fuel cell improvements. Save all documentation for your tax preparer but keep in mind that if you received a subsidy from a public utility for this work, you must subtract that subsidy from the cost you declare.
Receipts for other types of improvements like a new roof, finishing the basement, adding on, gutting the kitchen, or adding a patio or deck should be carefully maintained until you sell your property.
"If you bought your primary residence for $250,000 and years later, sold it for $800,000, you would automatically receive a $500,000 exclusion on your gains -- if you are a qualified married taxpayer filing jointly," Gleba said. "In other words, you would only have to pay long-term capital gains on $50,000 of profit. But you can even reduce the gain if you have receipts to show that you made improvements while you lived there."
If, for instance, you can prove you spent $30,000 to finish the basement and $20,000 on a new roof, you could reduce your capital gains to zero.
So the receipts and documents that are important to retain and show your tax preparer the year you sell your home are the original purchase documents and receipts for improvements. Things like painting, sealing the driveway and landscaping maintenance would not be considered improvements, Gleba said.
IRS 1098 forms showing mortgage interest paid, as well as escrow payments for property taxes, should be submitted annually for an annual deduction while you own the home. This is also applicable for a second home.
At this time of year it is also important to confer with your tax professional, Gleba said, to see if it would be beneficial to accelerate a mortgage payment or the tax payment on a second home that is located in a state where property taxes are due in January.
"It is all about timing and for some people, accelerating these payments can help their tax position," he said.
In the case of a second home that you rent out for extra income, Gleba cautions that you cannot occupy the home yourself more than 14 days a year or 10 percent of the total time it is rented during the year (whichever is greater), as it will not be treated as rental property for tax purposes. Of course, you must still report any income from the property, even if you don't receive the tax benefits of owning rental property, he added.
When making improvements to a qualifying residential rental property, improvements like new carpeting, roof, appliances or garage must be capitalized and depreciated over a period up to 27.5 years, depending on the improvement done. Carpet, for instance, would not be expected to last 27.5 years so it would be assigned a shorter life, Gleba said.
Receipts for routine maintenance done on the rental property ranging from plumbing repairs to painting to snow plowing should also be carefully filed and submitted annually, Gleba said, so that such expenses can offset annual rental income.
Regular expenses like insurance on the property, assessments to an association, utility costs, landscaping and snowplowing services (if not included in the assessments) can all be listed as expenses to offset rental income. Mortgage interest and real estate taxes on such properties is also deductible annually.
Porte Brown LLC is an accounting firm with offices in Chicago, McHenry, Tinley Park, in addition to its headquarters in Elk Grove Village. The staff of 75 certified public accountants, including 11 partners, concentrates on the traditional services of accounting, consulting, tax returns, audit reviews and audit compliance representation for businesses and nonprofit organizations, as well as for individuals. Its business-customer base encompasses construction and contracting, manufacturing and distribution, grocery and food services and professional services.
Porte Brown also provides valuation and transition planning, retirement and benefit services and technology solutions. For more information, call (847) 956-1040.