Are Home Improvements Tax Deductible?

If you own your house for a long time, chances are there will be a need for home improvements. This will keep your house updated throughout the years. Or, you may even be looking at houses to buy that may require some fixing up. 

But, do you get a tax break for completing those home improvements? Are home improvements tax deductible?

Unfortunately, the answer isn’t as simple as a yes or no. While home improvements may be tax-deductible, this will depend on your house, the renovations, and how you apply for the tax break. 

Keep reading to learn whether your home improvements are tax-deductible and how to claim these renovations on your taxes. 

What Home Improvements Are Tax Deductible?

The first and most common home improvement for tax deductions are general renovations made to your home after moving in. However, it’s important to note that the costs of a renovation will not affect that year’s taxes. 

Instead, the cost will be deducted the year you sell your house. This means that you won’t see any immediate impact from renovating your house, but you will see a payoff down the road if you can keep track of all the expenses. 

Another major thing to consider is whether you’ve invested in true improvements or simply repairs. These are considered to be two distinct categories in the eyes of the IRS. 

So, before you assume that the work you do on your property is tax-deductible, let’s break down the difference between tax-deductible home improvements and repairs.

Tax-Deductible Home Improvements

When you want to sell your house, you will have a cost or tax basis. A cost basis is the amount of money it costs to buy the property and any settlement fees. When you want to sell, you subtract the cost basis from the sale price, and that is your profit. 

The higher your cost basis, the lower your capital gains tax liability will be. So the higher, the better for tax purposes! And that’s where home improvements come in. Capital improvements add to your cost basis, lowering your tax liability when you sell the house. 

When you sell your house, you will pay taxes on the profit you make from the sale. So let’s say that (in an oversimplified example) you pay $200,000 for a house. You sell it for $250,000. You pay taxes for that $50,000 in profit. But if you make $20,000 worth of improvements, you will only pay on the $30,000 profit. 

Capital improvements are renovations that add to the value of your home, prolong its useful life, or adapt it to new uses. This is a fairly broad definition. Because of this, there isn’t one complete list that will qualify. But to give you an idea, here are some common capital improvements to home:

• Additions to the home such as a bedroom, bathroom, or deck.
• Plumbing improvements such as a new water heater.
• A new roof.
• Home security systems.
• New HVAC system.

Tax-Deductible Home Repairs

A capital improvement can be seen as a permanent, immovable addition to the house. Compare this to a repair that is simply fixing what was there. These will not add to your cost basis. Examples of repairs include:

• Roof repair (for example, replacing broken shingles or gutters).
• Fixing broken windows.
• Aesthetic touch-ups such as paint.

What Other Home Improvements Could Be Tax Deductible? 

While improvements vs. repairs are the two principal categories when considering tax deductions, they are not all you should look out for. Renovations are not limited to capital improvements, and you can find other tax deductions for renovating your home. 

Here are some other examples of other tax-deductible improvements. 

Medical Expenses

If a resident of the house has a medical necessity to alter the house, then renovations would be tax-deductible as a medical expense. While renovations add to the value of your home, renovations as a medical expense do not. These make the house livable for the current residents only rather than general upgrades. 

Medically necessary renovations could be:

• Installation of ramps
• Bathroom, shower, or bath modifications
• Accessibility renovations (widening doors and hallways, lowering cabinets, and adding handrails)

Immediate Improvements Needed 

If you are looking at a house now that will immediately require renovations, make sure the cost is considered in your mortgage. This will increase your mortgage interest deduction. That means that you will have a greater deduction if you itemize your federal returns. 

Energy Generation

If you’re looking to live a more green lifestyle, energy credits are the upgrade you want. When you install fuel cells, small wind turbines, qualifying geothermal heat pumps, solar energy systems, or biomass fuel stoves, you will get a credit on your federal return for the year that it was installed. 

How Can You Claim Renovations on Taxes?

Of course, it’s not enough to just know the answer is yes to “Are home improvements tax deductible?”. Now it’s time to get those deductions! 

Here are some tips to consider:

• For home improvements, you will not need to do anything immediately to claim deductions except keep all records and receipts. When you sell your home, you will need to claim capital gains from that year, which includes the profit from your house. Subtract renovations from the profit so that you are taxed on less.
• For other deductions and credits from upgrades to your house, these may require separate forms. For example, for energy efficiency upgrades, you will need to file Form 5695. For medical expenses, these can be treated as typical, itemized deductions on a Schedule A form.

Because there are so many kinds of upgrades and different protocols for each, speaking with a professional before you file your taxes can guarantee you get the return you’re looking for! But the rule of thumb for all renovations is the same: Keep all records and receipts! 

Get Tax Deductible Home Improvements with Associates Home Loan

As you can see, the question “are home improvements tax deductible” is complicated. Navigating the world of text credits and deductions from home improvements can be an overwhelming process. However, you can make it easier for yourself by keeping receipts and records of home improvements. 

You should also always work with professionals to get the best outcome for financing your tax-deductible home improvements. Contact the Associates Home Loan team to learn more about how you can get the home improvement of your dreams while also making a deduction on your taxes!