Are Home Improvements Tax Deductible?

When making upgrades, most homeowners ask, “Are home improvements tax deductible?” Broadly speaking, no. However, there can be exceptions.

Home improvements can potentially reduce your tax burden, such as capital improvements and upgrades related to medical care or energy-efficiency. In addition, if you use your home for something other than residential living, you may have access to additional tax breaks.

Use this guide to help you determine what tax deductions you may be eligible for.

Capital Improvements

Capital improvements are permanent upgrades, adaptations or enhancements that improve the property and increase your home’s value. To qualify as a capital improvement, the Internal Revenue Service (IRS) says that the property must meet the following conditions:

• The improvement substantially adds value to your home.
• The improvement prolongs the useful life of the property.
• The improvement is permanent.

According to the IRS, capital improvements aren't taxed directly but can affect the taxes you pay when you sell the property. This is why homeowners need to document improvements made during a renovation or remodel and to keep the receipts as proof.

The total cost of capital improvements is added to the cost basis of the house, which is what you paid to acquire the property. When you go to sell, increasing the cost basis through capital improvements can potentially reduce the taxable capital gain you realize on the sale of the property. This can help you lower your tax liability. While basic maintenance and repairs aren’t included, they could be when part of a larger renovation project that increases the property's value, extends its useful life or adapts it to new uses.

Home Renovations Vs. Home Repairs

The IRS may distinguish between what counts as a renovation and what counts as a repair. Being aware of this distinction can help you avoid any tax surprises when you go to sell your home. Accepted capital improvements are found in the IRS’s 523 publication.

Home Renovations

The project must add value to your home, prolong its useful life or adapt it to new users to qualify as a home renovation under IRS guidelines. Repair work may qualify if it’s part of the overall improvement. The cost of these improvements is added to the basis of your property.

But there are renovations that the IRS doesn’t count as capital improvements. These include improvements with a life expectancy of less than 1 year or improvements that are no longer part of your home, like if you installed carpeting and later ripped it out.

Here are some examples of home improvements that may count as qualifying renovations:

• Remodeling an entire room
• Adding an addition to your home
• Upgrades to major home systems, such as heating and cooling systems, security systems and duct work
• Upgrades to your home’s plumbing, including the septic system, water heater or filtration system
• Upgrades to your home’s exterior, including a new roof, siding or storm windows
• Improvements to the lawn and grounds
• Adding or replacing insulation
• Other improvements to the home’s interior, such as wall-to-wall carpeting, new floors, kitchen modernization or built-in appliances

Home Repairs

Repairs that are part of a more extensive renovation may count, but not if repairs or maintenance are necessary to keep your home in good condition but don’t add to its value or prolong its life. These cannot be added to your cost basis and don’t affect your tax liability.

Here are several home improvements that may count as home repairs:

• Replacing a broken windowpane
• Replacing kitchen cabinets
• Painting the interior or exterior of your home
• Fixing leaks
• Filling holes or cracks
• Replacing broken hardware

What Home Improvements Are Tax Deductible?

You can receive potential tax deductions on improvements that make your home more energy efficient or meet medical needs. Tax deductions may also be available to improve your home office space or maintain your rental property.

1. Home Office Deduction

If you have a space in your home that you use exclusively and regularly for conducting business, you can deduct certain expenses when filing your taxes. There are two basic requirements to claim this deduction: The home must be the principal place of business and have a space exclusively used for a business regularly. Both homeowners and renters may be able to deduct mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent by claiming the home office deduction.

2. Home Improvements For Medical Care

You may qualify for tax deductions if you’re considering a home remodel for medical needs, like a ramp or handrails. If the primary purpose of the improvement is to provide medical care for you or someone living in your home or it permanently increases your home’s value, you may qualify for this deduction. The IRS says covered medical expenses are to help “alleviate or prevent a physical or mental disability or illness” and also include insurance premiums, transportation to get to and from medical care and long-term care services.

3. Energy-Efficient Improvements

The IRS provides incentives in the form of tax credits to make your home more energy-efficient. Homeowners may receive a credit equal to a percentage of the cost of the “qualified property,” or energy-efficient equipment. This includes the cost of solar panels, energy-efficient water heaters, small wind turbines and a geothermal heat pump. Equipment placed in service after December 31, 2023, won’t qualify for the tax credit.

4. Rental Property Maintenance Deductions

If you rent a portion of your property, you may be able to write off part of your adjusted cost basis through depreciation each year it’s rented out. Improvements made only to parts rented out may be depreciated in full. On the other hand, improvements that benefit the entire home can be depreciated according to the percentage of the home used for rental. Repairs may also be tax deductible as they are considered necessary upkeep of the property.

How To Claim Your Home Improvement Tax Deduction

You cannot claim a home improvement tax deduction the same year you make them. In most cases, you’ll eventually see the benefit when you sell your home and the cost of improvements is added to the cost basis of your property. To prove your home’s tax basis to the IRS, you should document every improvement by keeping receipts, purchase orders, canceled checks and any other document that helps support your claim.

As always, consult a tax professional if you have questions or need assistance.

The Bottom Line

Are home improvements tax deductible? And if so, what improvements are tax deductible? These are essential questions to ask if you plan to renovate your home. Generally, homeowners don’t see any benefit until they sell their home; only specific improvements qualify for a deduction. Again, be sure to consult a tax professional if you have questions.

Looking to finance your next project? A cash-out refinance can be a good way to fund home renovations or home repairs. Apply for a cash-out refinance today for upcoming home improvement projects.