Which Home Improvements Are Tax Deductible?

Home improvements can provide significant value to your home. They can increase your home’s market value – this will be beneficial if and when you decide to sell the home – and make the space more usable and enjoyable for your family.

However, home improvements can also come with a significant price tag. And you might find yourself wondering whether there are ways to offset this cost. For example, are home improvements tax deductible? We’ll answer that question and more in this article.

Are Home Improvements Tax Deductible?

Most home improvements don’t qualify for tax deductions, particularly cosmetic ones. However, you may be able to reduce your tax burden if you renovate a home office, increase your property’s energy efficiency, upgrade a space you rent out or make changes due to a medical condition.

Tax Deductions, Exemptions And Credits For Qualifying Home Improvements

As we mentioned, there are a handful of home improvement projects that can help you save money on your tax bill through deductions, exemptions and credits.

Home Offices

If you own a business and work from a home office, you may qualify for a tax deduction. The IRS rule is that your home office must meet two basic requirements to qualify for a deduction:

• Regular and exclusive use: You need to use part of your home regularly for conducting business and must use it exclusively for that purpose. So, if you have a spare room that you’ve set up as an office where you perform most of your work, you can deduct expenses for that room. However, you can’t claim the deduction if you often work from the couch in your family’s living room, for example.
• Principal place of business: You must use this space in your home as your main place of business. If you rent an office space and only use your home office occasionally, that doesn’t qualify. You can still take a deduction if you conduct business outside the home occasionally, but your home office must be the primary place you work from.

Home office deductions are based on the percentage of your home that your office occupies. Additionally, you can write off any improvements that benefit that room alone. For improvements that benefit the entire house, you can deduct the percentage that applies to the office, just like the home office deduction.

Rental Spaces

The IRS doesn’t allow you to deduct home improvements you make to a rental property you own. However, you can deduct the cost of repairs you make.

Here’s the difference between non-deductible home improvements and deductible repairs:

• An improvement is a change that extends the life of your home, raises its value or adapts it for different uses. Examples include adding a deck, renovating a kitchen or bath or replacing an electrical system.
• A repair simply keeps the home in good working condition. Repairs include things like painting a room, fixing appliances and replacing smoke detectors.

Medical Conditions

Some home improvements are tax deductible if they are done to make your home more accessible to you or another family member who has a medical condition. Because they don’t usually add value to the property, they can be considered medical expenses.

As stated by the IRS, deductible medical improvements include (but aren’t limited to):

• Constructing entrance or exit ramps for your home
• Widening doorways at entrances or exits to your home
• Widening or otherwise modifying stairways, hallways and interior doorways
• Installing railings, support bars or other modifications to bathrooms
• Lowering or modifying kitchen cabinets and equipment
• Moving or modifying electrical outlets and fixtures
• Installing porch lifts and other forms of lifts
• Modifying fire alarms, smoke detectors and other warning systems
• Adding handrails or grab bars anywhere
• Modifying hardware on doors
• Modifying areas in front of entrance and exit doorways
• Grading the ground to provide access to the residence

You may be able to deduct more significant improvements that add value to your home, such as installing an elevator or a swimming pool. However, you must reduce the deduction by the amount the improvement increases the value of your home.

For example, if you make an improvement that costs $10,000 and adds $5,000 of value to your home, you may be able to deduct $5,000 of the improvement costs. It’s important to note, medical home improvements may be eligible for deductions as medical expenses, but the deductible amount could be subject to an adjusted gross income (AGI) threshold.

The IRS also says that the improvements must be for medical accommodations only, not for architectural or aesthetic reasons.

Energy-Efficient Systems

Some home improvements may qualify for a tax credit instead of a tax deduction. This means that instead of lowering your taxable income like a deduction does, it decreases the amount of tax you owe.

Examples of home improvements eligible for a tax credit are energy-efficient upgrades. Here are some examples:

• Solar panels and other solar electrical systems
• Solar water heaters (must be certified by the Solar Rating & Certification Corporation or your state’s comparable entity)
• Small wind energy turbines (can’t generate more than 100 kilowatts of energy)
• Geothermal heat pumps (must meet ENERGY STAR certification requirements)
• Fuel cells (only qualifiable in primary residences)
• Biomass fuel stoves (must have a thermal efficiency rating of at least 75%)

You can also get a tax credit for making smaller improvements to make your home more energy-efficient. This may include adding insulation, installing energy-efficient windows and replacing your old water heater with an ENERGY STAR-certified one.

For improvements made after January 1, 2023, the maximum tax credit amount is $3,200. However, some individual purchases and improvements may have their own limits.

Home Sales

Some home improvements can reduce the tax you’ll pay when you sell your home. When you sell your home for more than you paid for it, it’s considered a capital gain, which you are taxed on. You can exclude some of the taxed amount of the gain by raising your basis, which is the financial investment you’ve made in your home, including the price you paid for it and any improvements you’ve made during the time you owned it.

For example, say you paid $250,000 for your house 6 years ago. Over the past several years, you’ve renovated the kitchen, gotten a new roof and replaced your driveway, spending a total of $50,000 on improvements. This would raise your basis to $300,000. If you sell your home for $350,000, you would only have a capital gain of $50,000.

In order to exclude some of your capital gains tax, you must meet a few requirements:

• You’ve owned and used the home as your primary residence for at least 2 out of the past 5 years.
• You haven’t excluded gains from a home sale in the 2 years prior to your current sale.

Improvements that can raise your home’s basis include:

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

There are also a handful of improvements the IRS explicitly prohibits you from including in your basis. Those improvements include:

• Repairs or maintenance that are necessary to keep your home in good condition but don’t increase its market value
• Improvements that are no longer part of your home (such as carpet you installed and then removed)
• Improvements with a life expectancy of less than 1 year at the time they’re installed

Can You Write Off Home Repairs?

In most cases, you won’t be able to deduct maintenance and repair costs for your home. But, if those expenses are part of a larger project that does qualify for a write-off, you might be able to put the repairs toward a deduction.

The Bottom Line: Some Home Improvements May Be Tax Deductible

Tax deductions and credits can significantly reduce the cost of your home improvements. Unfortunately, most improvements aren’t deductible.

The good news is that you may still be able to save some money on your home improvements. The federal government allows you to deduct the interest paid on a home equity loan¹ if you’ve used the money to buy, build or substantially improve your residence.

If you’re considering home improvements and need to borrow money to cover the cost, apply for a home equity loan to find out how much you qualify for and get the process started.