How will the money you spend on home improvements affect your taxes? The short answer is, it depends.
While most home improvements aren’t immediately tax-deductible, some can provide significant tax benefits in certain situations. For example, energy-efficient upgrades can offer immediate tax advantages, and larger home remodels may benefit you when you sell your home.
In this guide, we’ll explore the tax implications of different types of home improvements and how you may be able to take advantage of them. However, you’ll want to consult with a certified tax accountant before moving forward.
Home Improvements Vs. Home Repairs for Tax Deductions
In general, home improvements may give you tax benefits, while repairs do not. So let’s first define what these terms mean.
Home improvements are changes made to your property that add value, extend its life, or adapt it to new uses. These upgrades typically involve significant alterations or additions to your home. Examples include:
- Renovating an unfinished attic space
- Remodeling a kitchen
- Adding a new room or deck
- Installing a new HVAC system
Home improvements are generally not immediately tax-deductible but may provide tax benefits when you sell your home.
What Qualifies as a Repair?
Repairs are fixes made to maintain your home’s current condition or restore an item to its original state. These tasks don’t typically increase your home’s value or prolong its life. Common repairs include:
- Patching a leaky pipe
- Replacing a broken windowpane
- Fixing a faulty appliance
- Repainting walls
Repairs to personal residences are not tax-deductible. However, they may be deductible for rental properties or home offices used for business purposes.
Tax Deductions for Home Improvements: The Basics
In most cases, you can’t claim tax deductions for home improvements immediately after completion. However, certain types of improvements may qualify for tax credits.
According to the IRS, tax deductions reduce your income before calculating the taxes you owe. Tax credits, on the other hand, reduce the tax you owe and may give you a refund, even if you don’t owe taxes. Credits typically reduce your final tax liability more than deductions.
Energy-Efficient Home Improvements
Thanks to the 2022 Inflation Reduction Act, homeowners who make energy-efficient improvements may qualify for tax credits in the following tax year. Some eligible upgrades include:
- Installing Energy Star-qualified windows and exterior doors
- Upgrading to energy-efficient HVAC systems
- Installing geothermal heat pumps
- Installing solar panels
- Adding insulation
Keep detailed records of any energy-wise upgrades to help file for the credit. Also keep in mind that tax credit opportunities vary by state, so check with your local municipality. Combining federal solar tax credits and state incentives can further reduce the overall cost of going solar.
One of the most substantial tax incentives for homeowners is the federal solar tax credit. This credit allows you to deduct a percentage of the cost of installing a solar energy system. To claim this credit, you’ll need to file IRS Form 5695 with your tax return.
Medically Necessary Home Improvements
If you or a family member require home modifications due to medical conditions, you may be eligible for tax deductions on these improvements.
Qualifying Medical Home Modifications
Home improvements made for medical reasons can be tax-deductible if they don’t increase your home’s value and are deemed medically necessary. Some examples include:
- Installing ramps for wheelchair access
- Widening doorways and hallways
- Adding handrails or grab bars
- Modifying kitchen cabinets or bathroom fixtures for accessibility
These modifications must be primarily for medical care and not for personal preference or aesthetic reasons.
Home Office Improvements
If you use a portion of your home exclusively for business purposes, you may be able to deduct certain home improvement costs.
Deducting Home Office Upgrades
Improvements specifically made to your home office area are generally 100% deductible as a business expense if you file your taxes that way. These could include:
- Installing built-in shelving or cabinets
- Adding electrical outlets or improving lighting
- Upgrading flooring or windows in the office space
Keep detailed records of these improvements, as they’ll be necessary when filing your taxes. Taking photographs before and after the upgrades can provide additional documentation for your records.
Partial Deductions for Whole-House Improvements
For improvements that benefit your entire home, including your home office, you may be able to deduct a portion of the cost based on the percentage of your home used for business. For example, if your home office occupies 10% of your home’s total square footage, you could deduct 10% of the cost of a new roof or HVAC system as a business expense.
Tax Deductions When Selling Your Home
While most home improvements aren’t immediately tax-deductible, they can provide tax benefits when you sell your home.
When you sell your home, you may be subject to capital gains tax on the profit. You are generally able to exclude the first $250,000 in profit you make on a home sale (or $500,000 for married people filing jointly), but may be responsible for taxes on profits made above that limit.
However, home improvements can increase your home’s cost basis, potentially reducing your taxable gain. The cost basis is typically the original purchase price plus the cost of substantial improvements you’ve made over the years.
For example, if you bought your home for $400,000 and made $150,000 in improvements, your cost basis would be $850,000. If you then sell the home for $1 million, your taxable gain would be $450,000 instead of $600,000.
Record-Keeping Best Practices
Keep detailed records of all improvements to maximize potential tax benefits when selling your home. Consider these tips:
- Save all receipts and contracts related to home improvements
- Take before and after photos of major projects
- Create a spreadsheet or use a home improvement tracking app to organize your records
- Store digital copies of important documents in a secure, cloud-based system
By maintaining thorough records, you’ll be well-prepared to substantiate your home’s increased cost basis when it’s time to sell. Additionally, the documentation can assist if you face an audit or need to verify the improvements for any reason.
Rental Properties and House Flipping
If you own rental property, you can deduct the cost of improvements over time through depreciation. Some deductible expenses for rental properties include:
- Property taxes
- Insurance premiums
- Maintenance and repair costs
- Utilities (if paid by the landlord)
Consult with a tax professional to ensure you claim all eligible deductions for your rental property. In addition, consider maintaining separate bank accounts and records for rental properties to avoid any commingling of personal and rental expenses.
Tax Implications for House Flippers
For those involved in house flipping, tax treatment can be complex. While you can’t immediately deduct improvement costs, you can include these expenses in your cost basis when calculating profit upon sale. Some deductible expenses for house flippers may include:
- Renovation costs
- Property taxes
- Insurance
- Utilities during the renovation period
- Marketing expenses
If house flipping is your primary business, you may be subject to self-employment taxes in addition to income taxes on your profits.
