What expences can be deducted on a home purchase that involves remodeling?

You cannot deduct costs for materials or labor related to improving a personal residence. The costs get added to your basis in the house, so when you sell the house, you could have less of a capital gain. (Some or all of the gain might be excludable from your taxes anyway).

Remodeling cost is considered improvement and is added on to the base. If you pay 300,000 for the house and spend $50,000 on remodeling, the base (cost) of the house will be $350,000. If you sell your house in 2 years from now for $400,000 and if there is no other improvement, your profit will be $50,000 instead of $100,000. You can deduct the mortgage interest, points and the property tax on your 1040, but nothing else.

The other two people had hit the nail on the head in response to your question, however, there is SOME remodeling expenses that can be claimed, however, there are some limitations; which consist of the fact that they have to be related to a disability; for example, if you were to add a wheelchair ramp or something of the sort, you may claim that. Also, if you had sustained damage to a house and/or garage or something of the like due to a natural disaster such as a hurricane or tornado, you may claim those expenses to repair those as well. Good luck!!

In addition to the above answers, you might also be able to deduct the sales taxes you paid on the materials used to remodel. If sales taxes paid are deductible again in 2006, you can tack this amount onto the "standard" amount based on number of exemptions, income, and state (in addition to sales tax paid on a car, boat, or plane purchase). Keep receipts for all of that.

There are also some energy credits available n 2006. These will apply to residential property & are deducted on the homeowner's Form 1040.

A recent tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

* Insulation systems that reduce heat loss/gain
*
Exterior windows (including skylights)
*
Exterior doors
*
Metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

*
$50 for each advanced main air circulating fan
*
$150 for each qualified natural gas, propane, or oil furnace or hot water heater
*
$300 for each item of qualified energy efficient property.

The maximum credit for all taxable years is $500 – no more than $200 of the credit can be attributable to expenses for windows.

Additionally, the new law makes a credit available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity–only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity.

Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub.

Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.

These items must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008

you MAY be able to save on your PROPERTY taxes depending on where you live.

For Example in Nassau County, NY there is a home improvement exemption (HIEX) that will phase in the market value of the improvement over a period of 8 years… it doesn't apply to all home improvements but it applies to some. There are other places have similar exemptions.