Home remodelers can't cash in until they sell
With tax season under way, we look at some recent online questions put to our tax experts -- the California Franchise Tax Board's Daniel Tahara and the IRS's Jesse Weller.
Q Can the cost of a home improvement (i.e., a $15,000 kitchen remodel) be claimed on a tax return?
A For federal income taxes, you generally cannot claim a deduction for kitchen home improvements. You can, however, add the amount of your kitchen improvement to the cost basis of your home. That amount includes all costs for materials, labor (except your own) and expenses related to the work.
You need to know the cost basis in your home to figure any gain or loss when you eventually sell it. Generally, your cost basis is what you spent to buy or build the home. Any adjustments (increases or decreases in value) are used to figure gain or loss when you sell.
In your example, the adjusted basis in your home would increase by the $15,000 cost of your kitchen remodel. Keep copies of receipts and payments to substantiate the improvements, such as labor/material costs for new countertops and cabinets.
Note: Repairs or upkeep don't increase a home's cost basis. For example, costs of repainting walls or fixing a cabinet door wouldn't boost cost basis. For details, see IRS Publication 523 (Selling Your Home) or Publication 530 (Tax Information for Homeowners) at www.irs.gov.
Here's the situation: A family member makes a loan to another family member (with a signed promissory note). The loan recipient files for bankruptcy, and the loan is discharged. Can the person who made the loan write off the loss?
A It sounds like you may be able to claim a bad debt deduction, as long as the transaction was a valid loan. Here are basic rules for the two types of bad debts, business and nonbusiness:
A business bad debt, generally, is one that comes from operating a trade or business and is deductible as a business loss. Nonbusiness bad debts are deductible as short-term capital losses.
In order to deduct a loss, the debt must be genuine. That means it arises from a true debtor-creditor relationship based on a valid obligation to repay a fixed sum of money. The taxpayer must be able to show he/she intended to make a loan, not a gift, when the transaction took place.
If money is lent to a relative or friend with the understanding that it need not be repaid, for example, it is considered a gift and not a loan. A bad debt deduction is not permitted for a gift.
To be deductible, a nonbusiness bad debt must be totally worthless (i.e., with no reasonable chance the amount owed will be paid) and the deduction may be taken only in the year the debt becomes worthless.
Taxpayers also must show they have taken reasonable steps to collect the debt. Bankruptcy is usually good evidence of a debt's worthlessness.
IRS Publication 550 (Investment Income and Expenses) has more on nonbusiness bad debts. For more on business bad debts, see Publication 535 (Business Expenses). Each can be downloaded or ordered fromwww.irs.gov. Or call 800-TAX-FORM (829-3676) for a mailed copy.