To be upfront about home improvements and taxes: Most home improvements and repairs are not tax-deductible. There could be some benefits in planning your home improvements ahead and knowing the Do’s and Don’ts of filing taxes. Below we will break down some of the home improvement tax benefits you could take advantage of. We will also answer some frequently asked questions regarding home improvement tax deduction.
Tax Deductions for Home Improvement and Repairs
A quick primer: In their “Tax Information for Homeowners”, the International Revenue Service (IRS) categorizes tax deductions as either an improvement or a repair.
A home improvement — like building a deck or adding central air — is something that adds value to your home.
A repair is something that keeps your home in good operating order — like fixing a leaky faucet or replacing a broken window. Unless your repair adds value to your home, most repairs cannot be deducted from your taxes.
Which Home Improvements are Tax-Deductible?
While most home improvements are not tax-deductible, they could lead to tax benefits when you go to sell your home. If you plan well, you could qualify for some of the benefits listed below.
Tax-Deductions for Home Improvements Could Include:
- Home office improvements
- Rental property improvements
- Loan interest deductions (If you pay for the improvements through a mortgage or home equity loan.)
- Qualifying medical expenses
Other Tax Benefits:
- Through a limited-time tax credit, you could claim the cost for installing energy-efficient technology on your property.
- If your improvements add value to your home, you could potentially earn non-taxable capital gains when you go to sell your home.
Home Office Tax Deductions
You could get a small deduction on the improvements you make to your home if you use one of the rooms in your home as an office.
Additionally, any repairs that benefit your entire home may also be deducted based on the percentage of your home that is used as an office. For example, if you add central air to your home and your office makes up 10% of your home, you could deduct 10% of the cost. The IRS Form 8829 “Expenses for Business Use of Your Home” helps you to figure out which taxes are deductible for your home office.
Home Renters Improvement Tax Deduction
If you rent out a part of your home, you may be able to deduct in full any improvements you make to that space. For example, if you decide to add a bathroom to the rental space, you likely can write off 100% of that expense.
Use Your Mortgage to Pay for Home Improvements
The way you pay for home improvements could be away to save on your taxes. If you’re planning on making improvements to a home you bought this year, you may be able to roll the expense into your mortgage. While the expense will accrue interest through your mortgage, the amount you pay in interest may qualify for a deduction on your taxes.
Get Tax Benefits from Home Improvements for Qualifying Medical Expenses
If your doctor suggests home modifications to provide care for you or a family member, you may be able to deduct the expense. Qualifying medical expenses could include a wheelchair ramp, modified doorways, even adjustments to outlets and fixtures. However, if the medical home improvement adds value to your home, it will not be deductible.
Other Types of Home Improvements That Could Save You Money on Your Taxes
The IRS has a lot of requirements for home improvement tax deductions, but there are two other ways homeowners could save when filing taxes.
Save Money by Upgrading Energy Systems
The Residential Renewable Energy Tax Credit is a limited-time credit that’s available when you install energy-efficient equipment on your home’s property. You could claim any of the following for deduction:
- Solar hot water heaters
- Solar electric equipment (like solar panels)
- Geothermal heat pumps
- Small wind turbines
- Fuel cell properties that use renewable fuels
This federal tax credit is only available through 2021, but you may be able to claim up to 26% of the cost of purchasing and installing energy-efficient technology. Use the IRS Form 5695 “Residential Energy Credits” for a deduction.
Sell Your Home and Make 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. Just be sure to keep good records of how much you paid for your home and spent on renovations (As in, hold onto every invoice and receipt!).
Home Improvement and Repair: Tax Deduction FAQs
If maneuvered well, home improvement tax benefits can yield an advantage. Here are some answers to frequently asked questions about home repairs, improvements, and tax deductions.
Are Home Foundation or Roof Repairs Tax-Deductible?
Fixing the foundation or replacing roof shingles on your home are not tax-deductible. That is because most repairs do not add value to your home. However, if the repair does add value to your property (like a roof replacement), it could be considered a home improvement. In that case, you may be able to get a tax break in the year that you sell your home.
Are Home Improvement Loans Tax Deductible?
Maybe! You might be able to fully deduct interest paid on a loan that is used to improve your home if you meet certain IRS requirements. Learn more about how home improvement loans work.
Can You Deduct Repairs on a Second Home?
Unless your second home is used as a rental property or business office, you likely cannot write off repairs on a second home.
Are Rental Home Repairs Tax Deductible?
Yes – if you receive rental income for a property you own, you can deduct the cost of repairs from your taxes.
The Most Important ‘Do’ of Home Improvement Tax Do’s and Don’ts
When you’re planning your home improvements, there is a lot to think about. But if you are strategic about what home improvements you make and why you may be able to take advantage of some tax benefits.
The most important habit to make when you’re planning home improvements or filing taxes is to keep track of every single expense. When you have a clear record of everything you have done on your home, you can be sure you are taking advantage of every tax benefit you qualify for.
Please note this article is not intended to provide tax advice. We encourage everyone to consult a tax professional for special home improvement tax deduction and all general tax questions. For more information on tax implications and homeownership, visit IRS.gov.