Most people want to know more about the financial demands and expectations that come with buying a house than they want to know about what goes into improving a house. However, it is important to be knowledgeable about home improvement in terms of finances, especially when it comes to tax implications. For example, do you know if home improvements are taxable in New Jersey? If you don’t (and if you are curious), here is a short explanation about the tax benefits and disadvantages that come with improving your home.
Sales Tax Guidelines
Before we begin taking a look at the different tax regulations regarding home improvements, it is important to define what this term means. According to the state of New Jersey, a home improvement (better known as a capital improvement when it comes to taxes) is an addition or alteration made to a property that adds a substantial amount to the current value of the property or adds many years to the life of the property, becomes a part of the property or is built in such a way that its removal would damage the property, and is an addition that is intended to become a permanent part of the property itself. For example, if you hire Everdrain™ to install a metal roof on your property so that you can make your property cooler and use less energy, this would be a capital improvement.
Fortunately enough, most capital improvements are exempt from sales tax. However, there are some capital improvements that will still require you to pay tax. As of the law change in 2006, installing floor coverings or carpet, installing hard-wired security systems and alarms, and requiring certain landscaping services do not fall under the tax exemption in terms of capital improvements. Any repairs made to the property or regular maintenance will require you to pay sales tax as well.
The Bigger Picture: Tax Deductions
Current homeowners may have an even more important question, am I able to deduct these capital improvements from my taxes? Unfortunately, you will not be able to deduct these capital improvements from your annual tax amount. However, there is some good news. Let’s say that you install energy efficient windows in New Jersey and replace the regular panes and frames in your home. While you will not be able to benefit from this capital improvement now, it will pay off in the future if you should choose to sell your home. Every home improvement made adds to the tax basis, which is any expense added on top of your initial purchase price. The greater your improvement in comparison to your profit, the less taxes you are going to have to pay on the total made when you do sell. Keep in mind, however, that the more you spend on your property, the less profit you are going to make overall unless you sell your home for an incredibly higher price than you initially purchased it for.
So, are home improvements taxable in New Jersey? For sales tax, absolutely not and this can be an amazing benefit if you plan on doing a lot of construction! You won’t have to worry about paying all of those additional taxes as long as you file the right paperwork and give it to your contractor and make sure that your home improvements don’t go against any of the exemptions. As far as tax deductions go, you are going to still have to pay taxes without benefiting from these home improvements. However, you will have something to look forward to if you choose to sell your home in the future!