Can we deduct home improvement costs or the sales tax associates to home improvement items?

[coop2008]

Is sales tax only on materials deductible or is sales tax on labor also deductible?

[DS30]

It only relates to the sales tax on the material costs.

[DS30 · Accepted solution]

Unfortunately no, you can not deduction home improvement costs on a personal residence.

However, if these are capital improvements and they increase the value of the home, you can add the cost to the basis in your home.

Yes, you will include the sales tax on these improvements under the "building material" category under the major purchases under sales tax. This additional major purchase is only allowed for materials used on a personal residence (any rental improvements will be included under the rental section)

A few things to remember about this deduction, you will only get this extra deduction if:

• The sales tax rate on this major purchase needs to be the same rate as your state's general sales tax rate.
• You are taking the state's sales tax deduction as opposed to the state's income tax deduction.
• You itemize on your return.

To enter your sales taxes and major purchases in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Deductions & Credits”
3. Next click on "jump to full list" or “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Estimates and Other Taxes Paid ”
5. Choose "show more", then Sales Tax (start/update/revisit)
6. Choose - continue to sales tax and choose "Easy Guide"
7. If your state sales tax information is already entered you will need to edit it to enter your major purchases information.
8. On the screen that says Major Purchase - select "yes"
9. Enter your building material information and sales tax here on the next screen. (screenshot)

As noted above: you are only allowed the major purchase additional sales tax amount if the sales rate you used for your general state sales tax rate is the same sales tax rate on your major purchase.

So if you used a 8% general sales tax rate for your state, this would have to be the same sales tax rate for your building material purchases. Just make sure that when you enter this information under the "Major Purchase" section, that your sales tax divided by your cost is your general state's sales tax rate.

[Anonymous]

What is the total invoice on the improvement was materials and labor all including sales tax?   Must it be only labor and it’s sales tax?

[el1668]

In terms of timing for deducting sales tax for home improvement, let's say we signed a contract to build a new sunroom addition at the end of the year and paid a small deposit, do you deduct the sales tax in the year you sign the contract or do you deduct the sales tax in the year the money is paid to the builder or when it is complete?

[MarilynG1]

@el1668 You can deduct the Sales Tax in the year the contract was signed.

Click this link for more info on Sales Tax for Home Improvements.

[leekillough]

You may deduct the sales taxes on a major home improvement if:

1. You elect to deduct state sales taxes instead of state income taxes. And:

2. Either:

  a. You itemize the actual sales taxes paid during the tax year. This may include sales taxes on services, like installation.

  b. You choose the general sales tax deduction, which is a standard deduction based on your income and location, and you add the sales taxes paid on the remodeling supplies (not labor), not to exceed the amount which would be obtained at the rate of the general sales tax in your area, and if you have any contractor(s), they are all considered your agents under state law, and you are considered to have full control over the ordering of supplies.

If you do a home improvement, you may add the costs of the improvement to the basis of your home, minus any sales taxes already deducted according to the above. This will reduce the capital gains when you sell the home.

Appliances are not considered a part of the home improvement, although the sales taxes paid on them are deductible if you itemize your sales tax deduction on the year that they were bought.

[leekillough]

As a personal example, I did a major remodel in 2020.

There is no income tax in my state. The sales tax rate is 10% in my area. Therefore I took the state sales tax deduction instead of the state income tax deduction.

I paid the following in state sales taxes in 2020:

Building materials: $3223.23

Labor: $4061.40

Appliances: $ 542.37

Other sales tax: $ 1346.15

The General Sales Tax deduction for my location and income level is $2097.

I have two options:

If I take the General Sales Tax deduction and add building materials, the total deduction is $2097.00 + 3223.23 = $5320.23.

If I take the Itemized Sales Tax deduction, I can include sales taxes on materials, labor, appliances, and other sales taxes, and the total deduction is $3223.23 + 4061.40+ 542.37 + 1346.15 = $9173.15.

Therefore it is better for me to take the itemized sales tax deduction.

I don't know why so many people say that you cannot deduct sales taxes paid on labor or appliances, because you can if you choose an itemized sales tax deduction, and in a major remodel, it is often larger than the General Sales Tax plus Building Materials sales tax.

The total sales tax deduction limit is $10000, or $5000 if married filing separately, which some consider to be a marriage penalty.

Since I deducted the $3223.23 in sales taxes on $32232.28 of building materials, it cannot be added to the cost basis of my home. I can only add $32232.28 - 3223.23 = $29099.05 to the cost basis of my home.

The appliances cannot be added to the cost basis of the home, even though they are all new and improved, and they certainly increase the value of the home. But the sales taxes paid on the appliances can be added to the itemized sales tax deduction.

[JeffreyR77]

This is a great example of leveraging the tax code.  Hopefully you still had enough other itemized deductions to exceed your standard deduction.

[MarieD]

Can the homeowner deduct taxes on building materials for construction of new home when the contract is cost plus?  In this scenario the contractor sends copies of the bills to the homeowner, homeowner pays contractor and contractor pays vendors.

[Mike9241]

NO. the law requires you to buy the materials and pay the sales tax.