Everyone would love to reduce their tax bill and pay less money to the IRS. But did you know that you can deduct home renovations from your taxes? The good news is that some home improvements can reduce your tax liability. For example, home renovations that add value to your property, improve energy efficiency, or are adaptations for medical purposes are tax deductible.
Of course, not all home repairs can reduce your tax liability. And there are certain limits to the amount you can claim on your tax returns. But capital improvements to your home entitle you to tax deductions or tax credits.
As with most tax laws, the rules for writing off home improvements can be complicated. Therefore, this article aims to untangle the complexities when writing off home improvements on your taxes.
Before we learn more about home improvement tax deductions, there are a few things to watch out for. First, the rules can change from year to year. Therefore, you should discuss with a tax advisor how much you can deduct from taxes. Additionally, your income level can also impact home improvement deductions.
But before you submit all of your Home Depot receipts to the IRS, it’s essential to know what qualifies as home repairs – non-deductible expenses and home improvements – tax-deductible expenses.
What is a home repair?
Home repairs are part of regular upkeep and maintenance. Common home repairs include fixing leaky plumbing, patching drywall, replacing appliances, or painting walls. Unfortunately, typical home repairs are considered ordinary expenses and ineligible for tax deductions. What is the reason? They cannot increase your cost base when you sell your home.
Here is a list of common home repairs that do not affect your taxable income:
- Repair a broken gutter
- Roof repair or repair of broken shingles
- Replacement of a broken window
- Replacement or repair of furniture
- HVAC system repair
- Renovation of a bathroom
- Replace or restore damaged coating
- Repair a cracked driveway
- Build a new patio
The only exception to the list above is if you have a home office where you run a business. However, strict limits exist on the amount you can deduct from taxes.
What is considered a home improvement?
Home improvement expenses that you can include on a tax return must relate to capital improvements. They improve the cost base of your home, increase its value, improve energy efficiency, or make a home suitable for medical care.
What home improvement are tax deductible? Here are five areas where improving or adapting your property can lead to potential tax breaks for homeowners.
1. Energy efficient home improvements
Energy upgrades are a common tax deduction for homeowners. According to IRSyou can deduct between 22% and 30% of the cost of installing certified equipment and appliances that improve energy efficiency.
Incentive home energy upgrades can include the following upgrades:
- Installation of solar energy systems
- Geothermal heat pumps
- Install or improve insulation
- Installing a new oven
- Biofuel stoves
- small wind turbines
- Energy efficient heating and air conditioning systems
Certain energy efficiency improvements such as air-source heat pumps, water heaters and circulation fans allow a 10% tax credit up to a total cost of $500.
2. Home improvements to increase resale value
Any capital improvements that increase the resale value of your home can be included on your tax return. What home improvements are tax deductible in this case? Here are some examples of capital improvement projects:
- Make an attic or basement habitable
- Increase the number of bedrooms or bathrooms
- Replacement of the HVAC system with an energy efficient system
- Build an annex to the property
- Install a swimming pool
- install storm windows or doors
It’s good to know that the deduction for home improvements that increase resale value only applies when you sell your home. The profit on the house is called the “tax base”. You can then use the deductions to reduce your capital gains tax liability.
3. Home Improvements Related to Medical Care
It is possible to deduct home improvements when making adaptations for medical care. For example, the installation of special equipment, stair lifts, bathroom modifications or wheelchair access are all eligible tax deductions. Additionally, the IRS says that these medical expenses may be for you, your spouse or a dependent.
Here are some other examples of acceptable medical deductions:
- Lower kitchen cabinets to make them more accessible
- Medical equipement
- Extendable doors
- Modification of smoke detectors and alarm systems
- Modification of electrical outlets
- Install grab bars anywhere in the house
- Install air conditioning to improve the condition of respiratory diseases
The cost of improvements tax regulations state that you can only deduct medical expenses when they exceed 7.5% of your adjusted gross income. There are also state thresholds for deducting medical expenses.
What if medical home improvements add value to the resale value of the home? In this case, you can make a partial deduction when writing off home improvements in the tax years in which the improvements occurred.
4. Home Improvements for a Home Office
You can deduct home improvements from taxes related to your home office in your principal residence. To be eligible for tax relief, they must be part of your domicile, the “principal place of business”. It can be part of your home (like a converted bedroom) or a separate structure (like a converted garage).
How does the tax deduction for home office improvements work? The IRS allows you to deduct the percentage of your home that includes offices. For example, say your home is 2,550 square feet and your office is 180 square feet. The home office deduction is 7.06% of the improvement costs in this case.
Unfortunately, if you are a W2 employee working from home, you cannot claim home office upgrades as business deductions.
5. Repairs if you rent out part of your home
You can claim a tax deduction on rental property repairs, but not on home improvements. This also applies if you rent out part of your accommodation. However, it is not easy to distinguish between home repairs and home improvements in a rental property or a rented portion of your home.
The only way to deduct home improvements for a rental property is to write off the expense. This way, you can gradually recoup some of the upgrade costs. Therefore, you should speak to a tax advisor before filing returns with deductibles for rental properties.
How to pay off home improvements
You can claim capital cost allowances if you use part of your home for business purposes – home office or part of the property you rent. Depreciation is a means of claiming wear and major improvements. Depreciation may include 100% of improvement costs in these circumstances.
Suppose the improvements in the home office benefit the whole house. In this case, you depreciate the percentage of the property used for business purposes. In addition, you can depreciate a rental charge against rental income. As usual, with these tricky areas of tax returns, you should seek advice from a tax professional.
Home Repairs vs Home Improvements
The main difference between home improvements and home repairs is that repairs generally keep the house in good condition, while improvements add to the market value. For example, a new coat of paint will not add monetary value to a house. However, building an addition will increase the sale value.
Are home repairs tax deductible?
Generally, you can only include home repairs as a tax deduction if they relate to a part of your home used to operate a business. In this case, the cost of repairs is amortized. Therefore, before carrying out major repairs, find out if they can be classified as improvements. It’s also a good idea to back up all payment records and documents.
Can you deduct home improvements from your taxes? The answer is yes. Therefore, it is essential to keep track of all capital improvement expenditures.
However, not all deductions can be made in the same tax year. For example, home renovation costs related to improving energy efficiency or adapting the home for a medical condition can be claimed in the same tax year. But permanent improvements that increase resale value only provide tax benefits when you sell your home.
Not sure how to maximize deductions for your real estate business? In The book on tax strategies for the savvy real estate investorCPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year, but also to prepare an ongoing strategy that will make your next tax season much easier.
Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.