Homeowners are expected to spend $526 billion this year on upgrades to their homes. Given the steep cost of renovating an unfinished attic space or a kitchen, many are looking to write off some of those costs on their income taxes, says Candice Cane, EA, from the tax consulting firm Robert Hall & Associates. Here’s what you need to know…
Home Improvements Tax Deductions
The IRS does offer some valuable tax breaks for home improvements, but the upgrades have to be “improvements,” not repairs such as fixing a leak or painting the exterior, and the type of tax breaks you can get for different improvements vary. They include…
- Tax deductions, which decrease your annual taxable income, potentially lowering your tax bracket.
- Tax credits, which can directly decrease the amount of taxes you owe dollar-for-dollar.
- Capital gains tax benefits, which can reduce the taxes you owe on the profits you make when you eventually sell the home.
Understanding how these factors play into your tax situation can help you make smarter, more strategic decisions as you plan your home-improvement projects.
Surprising Home-Improvement Tax Deductions
Improvements for medical need
The IRS allows you to take a deduction on your annual income taxes for costs associated with modifying your home and property to accommodate a medical need for yourself, your spouse or dependents. Example: A client with a specific medical condition was told by his doctor to do daily water exercises, but his pool needed to be resurfaced to be functional. He was able to deduct the cost of the resurfacing. Similar improvements include: Adding entrance ramps…widening doorways…modifying hallways, kitchens, bathrooms and stairways to make them more accessible. Air conditioning may be a medical deduction as long as it is installed on the advice of a medical doctor for the treatment of a known medical issue.
Tax break: The costs for these improvements are reported as “medical expenses” on your tax return, not home-improvement expenses. But the cost of the improvement is reduced by the increase in the value of your home—the difference is a medical expense. If the value of your property isn’t increased by the improvement, the entire cost is included as a medical expense. To claim a deduction: You must itemize deductions (rather than using the standard deduction), plus you can deduct a total amount that exceeds only 7.5% of your Adjusted Gross Income (AGI). Example: If your AGI is $50,000 for the year, you can deduct the portion of your expenses exceeding $3,750.
Caveats: You need a doctor’s note substantiating that your home improvements are necessary for medical care, not for aesthetic reasons.
More information: Medical and Dental Expenses, IRS.gov/forms-pubs/about-publication-502.
Improvements to seal your home to the elements and improve energy efficiency
Included: Buying and installing exterior doors, windows and skylights that are qualified energy-efficient improvements…water heaters and central air conditioning (not window units)…adding insulation…having a home energy audit.
Tax credit: An Energy Efficient Home Improvement Tax Credit on your annual income taxes for 30% of the cost of the qualifying improvements, up to an annual total maximum of $1,200 for most projects ($2,000 limit for heat pumps, biomass stoves and boilers).
Caveats: New federal legislation eliminates this tax credit after December 31, 2025—any improvements must be fully installed and completed by that date, not merely paid for or ordered. You can’t get back more on the credit than you owe in taxes…and you can’t apply any excess credit to future tax years.
More information: Energy Efficient Home Improvement Credit, IRS.gov/credits-deductions/energy-efficient-home-improvement-credit.
Renewable energy equipment
Qualifying equipment includes: Solar panels and solar water heaters, heat pumps and fuel cells for primary or backup power generation
Tax credit: Residential Clean Energy Credit for 30% of the cost of new qualified renewable energy equipment. No maximum amount.
Caveats: Like the Energy Efficient Home Improvement Tax Credit above, this credit is eliminated after 2025. But with the Residential Clean Energy Credit, unused credit can be carried forward and used to reduce taxes owed in future years.
More information: Residential Clean Energy Credit, IRS.gov/credits-deductions/residential-clean-energy-credit.
Improvements that increase the home’s value, adapt it to new uses and prolong its useful life
Qualifying improvements include: Permanent landscaping such as trees, fences, retaining walls… new heating, cooling and plumbing systems…home additions…kitchen, bathroom and other room remodels.
Capital gains tax benefit: While these improvements can’t be deducted from your income taxes in the year they occur, they qualify as “capital improvements.” When you sell your home, the IRS allows you to add the cost of capital improvements to your home’s cost basis (the original amount that you paid for the property). This reduces the amount of taxable profits, or capital gains, from the sale of your house.
Caveats: Good records are essential in case you are audited, so keep receipts, contracts and before-and-after photos of major projects. In general, the IRS does not let you take a capital improvement tax benefit for an upgrade to your home for which you have already received a tax break in the past—but you may be able to claim a portion of the capital improvement benefit. Example: You spent $10,000 a decade ago replacing a tub in your bathroom with a walk-in shower. You received a medical expense deduction of $5,000 on your income taxes that year. So, you would be able to get a capital gains tax benefit of $5,000 when you sell your home.
More information: Selling Your Home, IRS.gov/forms-pubs/about-publication-523.
Interest on a HELOC or home equity loan for qualifying home improvements
To qualify for a tax break, the loan money must be used to “buy, build or substantially improve” your home, such as installing a new roof. You cannot take deductions for interest on loans used for debt consolidation or personal costs.
Tax deduction: The interest you pay on the loan can be reported as an itemized deduction on your annual income taxes.
More information: Home Mortgage Interest Deduction, IRS.gov/publications/p936.
