Although your budget determines the scope of your home remodeling project, it’s not the only financial factor. Whether you’re planning a kitchen remodel, a large addition, or a basement renovation, you’ll also need to examine the potential tax consequences.
Why Remodeling Changes Your Real Estate Tax Bill
Your tax bill is based on the assessed value of your home. When you make changes that increase the value, you may see a corresponding jump in your real estate tax bill. Although minor renovations or replacement of an aging heating system probably won’t cause a substantial increase in your taxes, a whole house renovation or an upscale kitchen/family room remodel can result in a big tax bump.
Keep in mind that the assessed value of your home may not increase by the exact amount you spent on improvements. Your municipality’s tax assessor will determine exactly how much value the renovation adds to your home and make his or her calculations accordingly.
Every municipality uses a different tax rate. You can estimate the potential impact on your taxes by plugging in your numbers on the AnytimeEstimate.com calculator.
While renovations can increase your tax bill, you won’t necessarily see the change right away. A major remodel may trigger an immediate reassessment of your property, but minor changes may not be reflected in your bill until the next time your municipality reassesses all of the homes in your neighborhood.
Obviously things can change at any time when taxes are involved. Before you start your renovation you may want to consult your accountant for advice. Your municipality’s tax office may also be able to explain how your proposed improvements could change your tax bill and when the increase would take effect.
Strategies That Can Lower Your Tax Burden
One-time tax credits can make renovation-related increases less painful. The federal government offers tax credits if you use renewable energy or energy-efficient products in your remodel, such as fuel cells, solar energy and geothermal heat pumps. You may also be able to lower your tax bill by replacing old appliances with energy-efficient ENERGY STAR appliances. In addition to a rebate on the purchase price, you might be entitled to a sales tax exemption.
Are your cabinets and countertops still in good shape? Donating them to a charitable organization can score you a federal tax write-off up to $5,000 without an appraisal. If the cost of the donated building materials is in excess of $5,000, you can still write it off, as long as you obtain an appraisal from a certified appraiser.
Despite the bump in your taxes, renovations are usually well worth it if they increase your square footage, modernize your home or make it more comfortable and attractive. If you’re ready to begin your remodel, give Master Remodelers a call. Our design/build team can help you update your aging kitchen, build a two-story addition to your house, or turn your lower level into an amazing game and theater room.
PA Department of Environmental Protection: Financial Incentives
Washington Post: How to Get a Tax Write-Off from Your Home Remodel
Internal Revenue Service: Determining the Value of Donated Property
Nerd Wallet: How a Remodeling Project Changes Your Property Tax Bill