You can find plenty of reasons to build an addition to your home. A well-planned and constructed addition can add value to your home and give you room to spread out. While you might get a number of benefits from adding on to your home, saving money on your taxes probably won't be one of them; at least not directly. You cannot deduct the cost of a home addition from your income when you file your federal income tax return.
Sales Tax
You can claim a deduction for either your state and local income taxes or your state and local sales taxes, but not both. If you built an addition to your home, you can add the cost of sales taxes you paid on building materials to the standard sales tax deduction, provided the sales tax rate was the same as the general sales tax rate. You have to itemize your deductions when you file your tax return to claim the sales tax deduction.
Mortgage Interest
Building an addition to your home is an expensive undertaking. If you took out a loan that is secured by the property for the purpose of purchasing building materials, paying fees for design plans and building permits, and paying your work crew, the IRS considers the loan to be a mortgage loan. You can deduct the interest on the loan as mortgage interest. You must itemize your deductions to claim a mortgage interest tax deduction.
Real Estate Taxes
The good news about building a home addition is it might increase the value of your home. The bad news is, the increased value might result in an increase in your property taxes. The semi-good news is, property taxes are tax deductible when you file your federal income tax return. You must itemize your deductions to claim the property tax deduction.
Tax Credits
While you won't get a tax deduction for adding on to your home, you might get a tax credit for including certain energy-saving items in your renovation plan. The federal government provides a 30 percent tax credit on the purchase and installation of geothermal heat pumps, residential wind turbines, solar energy systems and residential fuel cells through the 2016 tax year, according to the energystar.gov website. There may be other residential tax credits available which vary from year to year based on congressional mandates.
