Capital improvements: When are your home renovations tax deductible?

Imagine you’ve finally finished that major kitchen overhaul you’ve been dreaming about. You’re standing in your new, sun-drenched space, admiring the granite countertops and high-end appliances. While you’re undoubtedly enjoying the boost to your daily life, you might also be wondering how these upgrades impact your financial future. Beyond just enjoying the space, you've likely increased your home value.

Your kitchen renovation would be considered a capital improvement, a substantial and permanent alteration to your home that increases its value. Capital improvements aren’t only boosts to your quality of life, but they also offer significant tax advantages.

If you’ve got a project you’ve been considering breaking ground on, read on to learn more about what constitutes a capital improvement, how it affects your taxes, and what financing options are available.

What are capital improvements?

A capital improvement is a substantial and permanent alteration or repair to your home that increases your overall home value. Capital improvements typically include projects that modernize your property, extend its life, or adapt it to new needs, such as making the house accessible for medical purposes. They can also include significant additions, such as a new room, or more minor upgrades, such as installing energy-efficient appliances.

Documenting capital improvements, such as a renovation or remodel, can reduce your tax liability. Capital improvements typically are exempt from sales taxes, affect your home’s cost basis, and can help you pay less capital gains tax when you sell your property.

“I oversaw the makeover of a 100-year-old townhouse I was renting in Brooklyn,” says Dennis Shirshikov, a professor of finance and economics at City University of New York. “It involved many capital improvements, including re-plumbing an old, galvanized pipe system, which wiped out decades of rotten internal waterworks and sent the value of the house skyrocketing.”

Capital improvements vs. repairs and maintenance

It’s important to distinguish between a capital improvement and simple repairs or maintenance. Routine maintenance is intended to keep your home in good working condition or fix broken components rather than improving the property. Generally, these tasks cost less than capital improvements and don't offer the same tax perks.

However, the line can sometimes blur. If a repair is performed as part of a much larger improvement project, it may be classified as a capital improvement. “Unlike routine repairs, capital improvements typically become part of the property itself,” says Paul Miller, a certified public accountant and managing partner of Miller & Co. in New York City.

How do you know if a capital improvement qualifies?

For your improvements to qualify, it’s important to follow IRS rules. Typically, you must ensure the improvement:

• Is a permanent fixture of the home
• Is a desirable feature
• Increases the home’s value

More minor repairs and updates that aren’t permanent, such as adding or removing carpeting, generally don’t qualify as capital improvements. However, the repair or improvement could be eligible if it’s part of a larger project. For example, painting a home’s interior itself is not a capital improvement, but repainting after a fire as part of the repair might be.

Other times when a repair might not qualify as a capital home improvement include:

• It has a useful life of less than a year.
• It’s maintenance that doesn’t improve your home’s value.
• It’s a repair or improvement that has been undone, such as wall-to-wall carpet that was installed when you bought the home and later removed.

For more information, the IRS’s 523 publication lists accepted capital improvements.

Examples of eligible capital improvements

Many common energy-efficient home upgrades and high-ROI improvements qualify as capital improvements. Here are some common examples:

• Additions: Bedroom, bathroom, deck, garage, porch, patio
• Lawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, swimming pool
• Systems: Furnace, central air conditioning, ductwork, central humidifier, central vacuum, air and water filtration systems, wiring, security system, lawn sprinkler system
• Exterior projects: Storm windows and doors, new roof, new siding, satellite dish
• Insulation: Attic, walls, floors, pipes, and ductwork
• Plumbing: Septic system, water heater, soft water system, filtration system
• Interior projects: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace

“Some improvements blur the lines between repairs and capital upgrades,” Miller says. “For example, a repair that goes beyond restoration, such as replacing an entire HVAC system, can be considered a capital improvement.”

Shirshikov gives another “blurry” example: “Typical landscaping work is not considered a capital improvement. But if you are installing an irrigation system that changes the drainage of your property and prevents erosion, it may be eligible as a capital improvement.”

How do capital improvements affect your taxes?

The primary way capital improvements help you is by adjusting your financial standing in the eyes of the IRS through an increased cost basis and lower capital gains taxes.

Increased cost basis

Cost basis is the original cost of a property adjusted for factors such as improvements and depreciation. It typically includes the purchase price of your property plus closing costs and the cost of eligible home improvements. The complete cost basis formula looks like this:

Cost basis = Price + Eligible closing costs + Home improvements - Depreciation (if applicable)

“Think of cost basis as the starting point for figuring out your taxable gain when you plan to sell your home,” Miller says.

When you sell your home, you subtract the cost basis from the sale price to calculate your profit, which may be taxable. Capital improvements increase your cost basis, which can reduce how much of your profit is taxable when you sell your home.

Lower capital gains taxes

Capital gains taxes apply to profits you earn from selling assets, such as stocks, bonds, and real estate. Short-term assets, those typically held less than a year, are taxed in the range of 10% – 37%, while long-term assets, those typically held for more than a year, are taxed 0% – 20%.

When it comes to a home sale, the capital gains tax typically applies if you sell it for more than its original purchase price. If you bought a home for $200,000 and sold it for $300,000, the capital gain is $100,000 and is subject to the capital gains tax.

The IRS offers an exemption from the capital gains tax when selling your primary residence. To qualify for the tax exemption, you must have owned and used your home as your primary residence for at least 2 out of the past 5 years. If you’re a single taxpayer, the first $250,000 of profit from selling your primary residence is exempt from capital gains tax. If you’re married and filing jointly, the first $500,000 of profit from selling your primary residence is exempt. Sellers report their gains and claim the exemption on Schedule D (Form 1040) and Form 8949 when filing their tax return.

The amount you pay capital gains tax on depends on your cost basis. By subtracting your cost basis from the sale price, you get the taxable amount – the higher your cost basis, the less you pay in capital gains taxes.

Real-world example

Say you buy a home for $300,000. Over the years, you’ve spent $50,000 on eligible capital improvements, such as a kitchen remodel and a new furnace. When you decide to sell, your cost basis would be $350,000. If you sell your home for $750,000, your capital gain would be $400,000.

You file as a single taxpayer, so the first $250,000 is exempt, and you’d pay capital gains tax on $150,000. Without those improvements, your capital gain would be $450,000, and you’d have to pay capital gains tax on $200,000. Assuming a 15% capital gains tax rate, claiming capital improvements will reduce your tax bill from $30,000 to $22,500.

Qualified capital improvements are also exempt from sales tax, so you'd save even more money by not having to pay sales tax to contractors for that $50,000 project.

How does the IRS treat improvements for medical purposes differently?

While standard capital improvements only provide a tax benefit when you sell your home, home improvements for medical purposes can offer immediate tax relief. These are treated as medical expenses and can often be deducted in the year they are completed.

If an improvement for medical purposes increases the value of your home, you can only deduct the portion of the cost that exceeds the increase in value. However, if the improvement does not increase the home's value – such as widening doorways – the entire cost may be deductible. Additionally, the ongoing costs of operating and maintaining these medical-related improvements may also be tax-deductible. Because these rules can be complex, it's always a good idea to check if your home improvements are tax deductible before starting.

Examples of medical-related improvements

• Some examples of home renovations made for medical purposes include:
• Upgrading fire alarms, smoke detectors, and warning systems
• Lowering or changing kitchen cabinets and appliances for easier access
• Installing porch lifts or similar devices
• Adding handrails or grab bars in any location
• Relocating or adjusting electrical outlets and light fixtures
• Expanding or adjusting hallways and doorways
• Building entrance or exit ramps at your home

“I once helped a family install a gently sloping ramp and bathroom grab bars for an aging parent,” says Jacob Naig, a real estate agent, investor, and property manager in Des Moines, Iowa. “Although the out-of-pocket expense was not added to their cost basis, they could claim it on Schedule A of their tax return, which reduced their overall tax liability.”

In less clear-cut cases, be sure to consult a tax advisor to make sure a specific improvement qualifies as being medical-related.

Claiming a tax deduction for medical expenses

In order to claim a tax deduction for expenses incurred from eligible medical-related improvements, you must itemize your deductions on Schedule A when filing your taxes. The IRS allows you to deduct medical expenses only if they exceed 7.5% of your adjusted gross income (AGI).

For example, if your AGI is $100,000, only medical expenses over $7,500 are deductible. If your total itemized deductions don't exceed the standard deduction, taking this route may not be the most beneficial option.

How do homeowners finance capital improvements?

Whenever you’re ready to start your next project, there are several home improvement loan options you can use to fund capital improvements on your home.

Cash-out refinance

A cash-out refinance is when a homeowner takes out a new mortgage based on their home’s current market value, pays off the balance on their original loan, and keeps the difference in cash. The homeowner repays the cash as part of their new mortgage payment. A cash-out refinance requires you to have sufficient home equity to borrow. It also allows you to change your loan type and loan term.

Home equity loan

A home equity loan is a second mortgage where you borrow some of your home equity as a lump sum. You repay the loan in fixed monthly installments over an agreed period in addition to your primary mortgage. Home equity loans typically have fixed interest rates, which means your rate won’t change for the life of the loan. You can choose from several different loan terms, typically ranging from 10 – 30 years. The shorter your term is, the larger your monthly payments will be. If you think this is a good option for you, get in touch with a Rocket Mortgage Home loan Expert to discuss our Home Equity Loan options.²

Home equity line of credit (HELOC)

A home equity line of credit, or HELOC, is a second mortgage where your home equity is used to create a line of credit for use as needed.

A HELOC begins with a draw period, when you can borrow from your credit line as needed and make either minimum or interest-only payments on what you use. Once the draw period ends, your repayment period begins, and you can no longer borrow funds. You’ll make full monthly payments covering both principal and interest until the loan is paid off.

The length of these periods is based on your HELOC’s terms. For instance, a 30-year HELOC might offer a 10-year draw period followed by a 20-year repayment phase. A longer repayment period means smaller monthly payments but more interest over time, while a shorter one means higher payments with less interest in the long run.

Rocket Mortgage does not offer HELOCs at this time.

Personal loans

Personal loans are more accessible than home equity loans and typically unsecured, meaning you don't have to use something like your house as collateral. While they often have higher interest rates and lower loan amounts than equity-based loans, they can be processed quickly and have shorter terms. Before deciding on funding for your project, compare a home equity loan and a personal loan to see which fits your budget best.

FAQ

Here are answers to common questions about capital improvements.

Are there exceptions to deductible capital improvements?

Yes. Some capital improvements could be partially deductible or non-deductible depending on their purpose. For example, improvements with personal components, such as adding a swimming pool, are usually not deductible as medical expenses, although you can still add them to your cost basis. Specific energy-efficient improvements qualify for tax credits, not tax deductions. Also, you usually cannot depreciate capital improvements in the same year in which you make these improvements.

What is a capital improvement fee?

When you sell a home that’s part of a homeowners association, the HOA may charge a one-time capital improvement fee. Typically, a small percentage of the sales price or a specific dollar amount, this fee helps pay for major upgrades, replacements, and capital improvements within the community. A capital improvement fee is different from a routine maintenance fee.

What is a capital improvement plan?

A capital improvement plan is usually a multiyear plan to fund and execute capital improvements in a city or community. Municipalities, associations, and large property owners use these plans to budget for significant upgrades. Also called a capital improvement program, a capital project uses nonrecurring capital expenditures to construct, develop, or make upgrades to public buildings, bridges, parks, and transportation features. These features may include roads, sidewalks, bike lanes, bus stops, and subway platforms.

What is a certificate of capital improvement?

A certificate of capital improvement is a document that a property owner or other customer gives to a contractor or project manager. This document certifies that the project qualifies as a capital improvement and that no sales tax should be collected.

The bottom line: Capital improvements can help reduce your taxes

Capital improvements are permanent upgrades or structural changes to your residence that enhance its value, extend its useful life, or adapt it to new needs. These updates can increase your property’s cost basis, which decreases your taxable profit when you sell the home and reduces what you owe in capital gains tax. In some cases, specific improvements – particularly those made for energy efficiency or medical reasons – could also yield extra tax deductions or credits while you still own the home.

Although capital improvements have parameters, there are several ways to implement them and benefit from tax-exempt opportunities. You can finance a capital improvement project by borrowing against your home’s equity with a cash-out refinance or by taking out a home equity loan. Start a mortgage application to see how much you qualify for.

¹Refinancing may increase finance charges over the life of the loan.

²Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher‑priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

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