Before diving into home improvement tax deductions, it’s crucial to understand that most home enhancements and repairs are not tax-deductible. However, a well-thought-out strategy and a clear understanding of the tax-filing process can open doors to certain benefits. Read on to see what deductions you may be able to claim ahead of this year’s tax season.
Classification of tax deductions
In their official document titled Tax Information for Homeowners, the Internal Revenue Service (IRS) splits tax deductions into 2 broad categories: home improvements and home repairs.
A home improvement is any modification that enhances the value of your home, such as constructing a patio or installing an air conditioning system. On the other hand, home repair is maintenance that keeps your property in good working condition, like fixing a leak or replacing a damaged window.
Since an improvement could boost your home’s value, there’s a chance it could be tax deductible; however, home repair expenses are not. Though most home improvements aren’t tax-deductible, they can lead to tax benefits when you sell your house. If you plan wisely, you can get some of the benefits, such as:
Home office tax deductions
You may be eligible for a deduction on improvements if you use a room in your house as an office. Any repair that benefits your entire home could also be deducted based on the percentage of your home used as an office. IRS Form 8829 helps you figure out which expenses you might be able to deduct.
Tax deduction for home renters
If you rent out a part of your home, you may be able to fully deduct any improvements you make to that rented space.
Financing home improvements through your mortgage
You could save money on your taxes based on how you finance home improvements. If you plan on improving a home you bought this year, you can incorporate the expense into your mortgage.
Tax deductions for medical renovations
You could potentially claim a home renovation tax deduction if your doctor recommends modifications for medical purposes. However, if the renovation adds value to your home, it won’t be deductible.
Energy-efficient home improvements
You could claim the cost of installing energy-efficient technology on your property through a limited-time tax credit. If your improvements increase the value of your home, you could earn non-taxable capital gains when you sell your home.
Making a profit with untaxed capital gains
Home improvements that add value to your home may give you a tax break when you sell it. If your home sells for more than what you paid, the profit you make may be considered a non-taxable capital gain.
Home improvement and repair tax deduction FAQs
Here are some answers to frequently asked questions about home repairs, improvements, and tax deductions.
Q: Are foundation or roof repairs tax deductible?
A: Most repairs do not add value to your home; hence, they are not deductible. But, if the repair does add value to your property, it could be considered a home improvement.
Q: Are home improvement loans tax deductible?
A: You might be able to fully deduct interest paid on a loan used to improve your home if you meet certain IRS requirements.
Q: Can repairs on a second home be deducted?
A: Unless your second home is used as a rental property or business office, you likely cannot write off repairs to it.
Q: Are rental home repairs tax deductible?
A: Yes. If you receive rental income for a property you own, you can deduct the cost of repairs from your taxes.
Conclusion
When you’re planning your home improvements or filing taxes, it’s essential to keep track of every expense. Understanding the ins and outs of Home Improvement Tax Deduction can provide a significant advantage in maximizing your tax benefits.
Note: This article is not intended to provide tax advice. Always consult a tax professional for special home improvement tax deductions and all general tax questions. For more information on tax implications and homeownership, visit IRS.gov.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
