When you're investing in your home, whether it's a new roof, energy-efficient windows, or a kitchen remodel, one question that often comes up is: Are home improvements tax deductible? The answer—like tax-related matters—isn’t straightforward. Some home improvements can qualify for tax deductions or credits, but it largely depends on the type of improvement and your specific situation.
Understanding what qualifies and what doesn’t can save you money. In this article, we’ll break down the exceptions and explore additional tax breaks available to homeowners, so you can maximize your potential savings.
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Understanding home improvements and tax deductions
First, it's important to know the difference between improvements and repairs. The IRS treats these two categories differently, and while you can’t deduct the cost of repairs directly—as they are considered maintenance rather than an investment in the property—certain improvements might qualify for deductions or credits.
Home improvements: changes or upgrades that enhance the value of your home, extend its lifespan, or adapt it to new uses. These can range from small projects to major renovations. Examples of home improvements include adding a new room, installing a central air conditioning system, or updating your kitchen with modern appliances.
Home repairs: activities that keep your home in good condition but don’t add significant value or extend its life. Think of repairs like fixing a leaky roof, replacing a broken window, or patching up a driveway.
Home improvements that may be tax deductible
While not all home improvements qualify for tax deductions, certain types can offer potential tax benefits. Let’s see some home improvements you can claim on your taxes:
Capital improvement tax deduction
Capital improvements are significant upgrades that enhance the overall value of a home, extend its lifespan, or repurpose its use. These improvements might include adding a new bathroom or replacing an entire roof. From a tax perspective, capital improvements are important because they can increase your home's cost basis.
The cost basis is the original value of your property, plus the cost of any capital improvements, minus any depreciation. When you sell your home, the difference between your selling price and your cost basis is your capital gain, subject to capital gains tax. By increasing your cost basis through capital improvements, you effectively reduce your capital gains, and therefore, your tax liability when you eventually sell your home.
For example, if you bought your home for $300,000 and spent $50,000 on capital improvements, your cost basis would be $350,000. If you sell it later for $500,000, your capital gain would be $150,000 instead of $200,000, potentially saving you a significant amount in taxes.
Home office improvements
If you use a portion of your home regularly and exclusively for business purposes, you might be able to deduct certain home office improvements.
The home office deduction allows you to claim a portion of your home expenses, including improvements, based on the square footage of your office relative to your entire home. The deduction can cover a portion of costs like remodeling your office, installing new lighting, or even upgrading your office equipment.
The IRS offers two methods for calculating the home office deduction: the simplified option and the regular method.
- Simplified: you can deduct $5 per square foot of your home office, up to a maximum of 300 square feet, for a maximum deduction of $1,500.
- Regular: requires you to calculate the actual expenses related to your home office, including a percentage of your mortgage interest, utilities, home repairs, and depreciation.
Medical home improvements
Certain medically necessary home improvements can be deductible as medical expenses, offering some financial relief if you need to modify your home for health reasons. Examples include installing wheelchair ramps, widening doorways, adding handrails, or even modifying bathrooms to be more accessible.
To qualify for a tax deduction, these improvements must be primarily for medical care. The IRS allows you to deduct these costs as medical expenses if they exceed 7.5% of your adjusted gross income. This means that if your total medical expenses, including home improvements, surpass this threshold, you can deduct the excess amount.
However, it’s important to note that the value of your home might increase due to these improvements. If the modifications increase your home’s value, the deductible amount might be reduced by the amount of that increase.
Keep in mind that it’s essential to keep detailed documentation, including a note from your doctor stating the medical necessity of the improvements, as well as receipts and proof of payment.
Energy-efficient improvements
The federal government offers incentives for homeowners who invest in energy-saving upgrades like solar panels, energy-efficient windows, insulation, and HVAC systems.
The most notable tax credit for energy efficiency is the Residential Clean Energy Credit, which allows you to claim a percentage of the cost of installing renewable energy systems on your primary or secondary home. As of the most recent legislation, this credit is set at 30% of the total cost and is available through 2032, making it a significant incentive for going green.
There are also credits available for more conventional energy-efficiency upgrades, such as installing Energy Star-certified windows, doors, or insulation. These home improvements can qualify for a nonbusiness energy property credit, which offers an annual 30% credit, up to $1,200 combined. Heat pumps and heat pump water heaters have a separate annual credit limit of $2,000, which isn’t subject to the $1,200 cap.
Rental property improvements
The rules for deducting home improvements are different for rental properties that you own, because they can often be deducted as business expenses, offering significant tax advantages for landlords. Instead of deducting the full cost of the improvement in the year it’s made, these expenses are depreciated over the useful life of the improvement.
For example, if you spend $20,000 to replace the roof on a rental property, you can’t deduct the entire $20,000 in the year you improve. Instead, you’ll depreciate this cost over its useful life, allowing you to deduct a portion of the expense each year.
Historic home improvements
If you own a historic home, there may be additional tax incentives available to help offset the cost of restoring and preserving your property.
To qualify for these incentives, your home must meet specific criteria to be considered a historic property. Generally, this means the property is listed on the National Register of Historic Places or is located in a registered historic district and certified by the National Park Service as contributing to the district’s historic significance.
The Federal Historic Preservation Tax Incentives program offers a tax credit equal to 20% of the qualified expenses for restoring a historic building for income-producing purposes, such as a rental property or a business. Some states also offer credits for historic preservation, which can be used with the federal credit.
Home improvements that aren’t tax deductible
While some home improvements can lead to tax benefits, many common upgrades and repairs don't qualify as deductions, such as:
- Cosmetic changes: These typically don't add significant value to your home. Examples include painting, new flooring, or kitchen cabinet refacing.
- General repairs: Fixing a leaky faucet, replacing a broken appliance, or patching a hole in the wall are considered repairs, not improvements.
- Routine maintenance: Regular upkeep like mowing the lawn, cleaning gutters, or pest control doesn't qualify.
However, it’s important to note that while some of these expenses may not be deductible immediately, they can still add to your home’s cost basis. When you sell your home, a higher cost basis can reduce your taxable capital gain, potentially saving you money on taxes at that time.
Tax breaks for homeowners beyond deductions
Homeowners can take advantage of several other tax breaks. An example is the mortgage interest deduction, which allows you to deduct the interest paid on your mortgage and is especially beneficial for those with large or new mortgages.
It’s a key tax benefit that makes homeownership more affordable for many people and can result in substantial savings, particularly in the early years of a mortgage when interest payments are highest.
Another important tax break is the property tax deduction, which lets you deduct the state and local property taxes you pay each year. However, it’s important to be aware of the State and Local Tax (SALT) deduction cap, which limits the deduction to $10,000 per year for individuals and married couples filing jointly. This cap can be a significant limitation for homeowners in high-tax states, reducing the overall benefit of the property tax deduction.
In addition to deductions, homeowners may also benefit from the capital gains tax exclusion on home sales. If you sell your primary residence, you can exclude up to $250,000 of the profit from capital gains taxes, or up to $500,000 if you’re married and filing jointly, provided you meet certain conditions, allowing you to keep more of the profit from the sale of your home without being hit with a hefty tax bill.
How to claim your home improvement tax deductions
Claiming tax deductions for home improvements requires careful documentation and attention to detail. Start by keeping receipts, contracts, and even before-and-after photos to confirm your claims to the IRS and calculate the adjusted cost basis of your home when you eventually sell it. To claim your home improvement deductions on your tax return, follow these steps:
- Identify which improvements qualify for deductions or credits. For example, energy-efficient upgrades may qualify for tax credits, while medically necessary improvements might be deductible as medical expenses.
- Depending on the type of deduction or credit, you’ll need to fill out specific IRS forms. For example, if you’re claiming the Residential Energy Efficient Property Credit, you’ll need to complete IRS Form 5695 and attach it to your tax return.
- When filing your taxes, enter the relevant deductions or credits in the appropriate section of your tax return. For itemized deductions, include them on Schedule A of your Form 1040. For credits, make sure they are accurately reflected to directly reduce your tax liability.
- Store all documentation securely and ensure it’s well-organized. The IRS can request evidence for up to seven years, so having everything easily accessible is vital.
While it’s possible to navigate the deduction process on your own, it’s wise to consult a tax professional. Tax laws can be complex, and a professional can help ensure you’re claiming the correct deductions and credits and staying compliant with all regulations.
FAQs
Can you write off home improvements as a business expense?
Yes, home improvements can be written off as a business expense if they are made to a part of your home that is used exclusively for business purposes. For example, if you have a home office, improvements like installing built-in shelves or upgrading the lighting specifically for that office can be deducted. These expenses can be included as part of your home office deduction.
Are home repairs tax deductible?
Generally, home repairs are not tax deductible if they are made to your personal residence. However, if the repairs are made to a rental property or a part of your home that is used for business, such as a home office, they may be deductible. It’s important to distinguish repairs from improvements, as only the latter can potentially increase your home’s cost basis for future tax benefits.
Are new gutters tax deductible?
New gutters may be tax deductible if they qualify as a capital improvement, meaning they add value to your home, prolong its life, or adapt it to new uses. If the gutters are part of a larger renovation or are specifically required for energy efficiency upgrades, they might also be eligible for tax credits. However, if they are merely replacements or repairs, they generally aren't eligible for deductions.
Are structural repairs to a home tax deductible?
Structural repairs, like fixing a foundation or addressing serious roof issues, are usually not tax deductible for personal residences. However, if these repairs are made to a rental property or are medically necessary, they may be deductible. Additionally, major structural repairs that qualify as capital improvements can increase your home’s cost basis, providing tax benefits when you sell the home.
Can you write off home improvements if you work from home?
Yes, if you use part of your home exclusively for business, you can write off improvements made to that space as part of your home office deduction. For instance, if you install a new air conditioning system in your home office or build a dedicated workspace, those expenses can be deducted. The key is that the improvements must benefit the business portion of your home, and you’ll need to calculate the deduction based on the percentage of your home used for business.