Key Takeaways
- Most home improvements and repairs aren't tax-deductible, with some exceptions.
- Capital improvements can increase the cost basis of your home, which lowers your tax bill if you make a profit when you sell.
- Energy-efficient improvements can let you claim a federal tax credit; depending on where you live, they may lower your state or local taxes as well.
- Home improvements for medical reasons are deductible as medical expenses.
In general, home improvements aren'ttax-deductible, but there are three main exceptions: capital improvements, energy-efficient improvements, and improvements related to medical care.
Capital Improvements and Taxes
A capital improvement is something that adds value to a home, extends its useful life, or adapts it for a new use. In some cases, these improvements can lower the tax you pay on the proceeds you get from a home sale. First, though, it's important to understand which types of improvements qualify as capital improvements.
According to the IRS, the following projects are examples of capital improvements:
- Systems: Heating, central air, furnace, ducts, central humidifier, central vacuum, air and water filtration, wiring, security, or lawn sprinklers
- Additions: Bedroom, bathroom, deck, garage, porch, or patio
- Lawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, or swimming pool
- Exterior: Storm windows/door, new roof or siding, or satellite dish
- Insulation: Attic, walls, floors, pipes, or ducts
- Plumbing: Septic system, water heater, soft water system, or filtration system
- Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpet, or fireplace
Capital improvements add to the value of your home, they can help you save money on taxes if you make a profit selling your home by increasing the basis of your property. The basis represents the amount of capital investment you've invested in a property. If you sell your home and make a profit, you earn a capital gain that equates to your profit on the sale.
In general, you won't need to report a capital gain on the sale of your home during tax season if you meet certain primary residence and ownership requirements, and the profit form the sale is less than $250,000 (or $500,000 for married taxpayers filing jointly).
Note
If you are taxed, you can subtract the basis (capital investment) from your sale revenue, thereby lowering the capital gains tax you owe.
Capital Improvements vs. Repairs
While making repairs to a property may feel like a capital improvement to the owner who spent time and money on them, they won't necessarily count as capital improvements to the IRS. Mark Steber, senior vice president at tax-prep company Jackson Hewitt, told The Balance in an email that home repairs such as fixing gutters or painting a room are considered general maintenance instead of capital improvements.
Repairs may count as capital improvements if they were done as part of a bigger project, such as an extensive remodeling or restoration job, though. For example, replacing a broken windowpane is normally considered a repair. However, if you're replacing a windowpane as part of a much larger project that involves replacing all the windows in your home, it can count as an improvement.
Tax Credit for Energy-Efficient Improvements
If your home improvements meet certain energy-efficiency standards, you may qualify for the residential energy-efficient property credit. This tax credit allows homeowners to receive a credit that is equal to a certain percentage of the cost of "qualified property." In this case, qualified property refers to the following types of energy-efficient equipment:
- Solar electric
- Solar water heaters
- Geothermal heat pumps
- Small wind turbines
- Fuel cells (with a $500 limitation for each half kilowatt of capacity)
- Biomass fuel
The following chart outlines what percentage of the home improvement cost qualifies based on the year the improvements happened.
| When the Property Was Placed in Service | Percentage of Cost That Qualifies |
|---|---|
| After Dec. 31, 2016, and before Jan. 1, 2020 | 30% |
| After Dec. 31, 2019, and before Jan. 1, 2023 | 26% |
| After Dec. 31, 2022, and before Jan. 1, 2024 | 22% |
Tax Deduction for Home Improvements for Medical Reasons
Certain capital improvements considered to be medical expenses can qualify for deductions. If a home improvement's main purpose is to help provide medical care for you, your dependent, or your spouse, you can include it as a medical expense on your taxes. If a permanent improvement increases the value of your property, you may also be able to include it as a capital improvement.
Note
A tax deduction is different from a tax credit. A deduction involves subtracting the amount of the deduction from your income before you determine what you owe in taxes, while a tax credit is subtracted from the taxes you owe.
To do so, you subtract the increase in your home's value from the cost of the improvement. The remaining difference can be counted as a medical expense. If your property value does not increase because of improvement, you can count the entire cost of the home improvement as a medical expense.
The following home improvements are examples of medical expenses, according to the IRS:
- Building entrance or exit ramps
- Widening doorways at entrances or exits, or modifying hallways and interior doorways
- Installing railings or support bars in bathrooms
- Lowering kitchen cabinets to make them more accessible
- Modifying fire alarms and smoke detectors
- Adding handrails or grab bars
- Modifying stairways
Note
Home improvements done for aesthetic reasons don't qualify for this deduction. The improvement must adapt a home to a disabled condition to qualify as medical care. This deduction only covers reasonable costs.
The Bottom Line
Even though your home improvements may not qualify for a tax deduction, Steber recommended keeping detailed records of your expenses surrounding any home improvements.
"They can be important when the time to sell comes or disaster strikes, natural or otherwise," Steber said. "If you have any issues with expenses or improvements, personal or business, it is a best practice to consult a tax pro to find out what matters on your taxes, and what matters later."
Generally speaking, home improvements aren't tax-deductible, but there are some tax-saving opportunities worth keeping in mind. Capital improvements can help save money on capital gains tax after selling a home, while certain medical-related and energy-efficient improvements can lead to tax benefits.
Frequently Asked Questions (FAQs)
If my home remodel isn't tax-deductible, why should I keep financial records?
Even though you may not get a tax break for remodeling your home, any improvements that add to the value will be relevant when calculating capital gains tax. If you were to sell your home in the future, you could offset some of the income with a higher basis that comes from the remodel.
Can I deduct home improvements for a rental property?
Although you may be inclined to call home improvements for a rental property a business expense, the IRS does not allow you to deduct them from your overall tax liability. If you earn income from a rental property, you can deduct certain types of expenses used in the regular operation of the business. These are limited to ordinary maintenance and upkeep, and do not extend to renovations or other improvements.
Which types of home improvements get the best tax breaks?
The home improvements that produce the greatest tax benefit will depend on your personal tax situation. However, energy-efficient improvements are incentivized in many states, as well as at the federal level. For example, California residents who install solar panels are eligible for a federal tax credit, a state rebate, and potentially a property tax break as well.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
As a seasoned expert in tax-related matters, particularly in the context of home improvements and their implications on taxation, I bring to the table a wealth of knowledge and practical insights that stem from years of hands-on experience and a deep understanding of the relevant regulations.
Let's delve into the key concepts presented in the article:
Capital Improvements and Taxes
Definition of Capital Improvements: Capital improvements are enhancements that add value to a home, extend its useful life, or adapt it for a new purpose. The IRS provides a comprehensive list of examples, including systems (heating, central air), additions (bedroom, bathroom), lawn and grounds improvements, exterior enhancements, insulation, plumbing, and interior upgrades.
Tax Implications of Capital Improvements: Capital improvements can increase the cost basis of your home. The basis is the amount of capital investment in the property. This is crucial because when you sell your home, a higher basis can offset your profit, potentially lowering your capital gains tax. Meeting certain primary residence and ownership requirements may also exempt you from reporting capital gains under certain profit thresholds.
Capital Improvements vs. Repairs
Distinguishing Between Repairs and Capital Improvements: Not all work done on a property qualifies as a capital improvement. Repairs, such as fixing gutters or painting a room, are generally considered general maintenance rather than capital improvements. However, repairs undertaken as part of a larger project, like extensive remodeling or restoration, may be treated differently.
Tax Credit for Energy-Efficient Improvements
Residential Energy-Efficient Property Credit: Energy-efficient improvements meeting specific standards can qualify homeowners for a federal tax credit. This credit applies to qualified property like solar electric systems, solar water heaters, geothermal heat pumps, small wind turbines, and biomass fuel. The credit percentage varies based on the year the improvements are made.
Tax Deduction for Home Improvements for Medical Reasons
Deductibility of Medical-Related Home Improvements: Certain capital improvements deemed medical expenses may qualify for deductions. If a home improvement is primarily intended to provide medical care for yourself, dependents, or your spouse, it can be included as a medical expense on your taxes. The IRS provides a list of qualifying improvements, such as building entrance ramps, widening doorways, and installing support bars.
The Bottom Line
Importance of Detailed Records: While most home improvements may not be directly tax-deductible, maintaining detailed records is crucial. These records become valuable when calculating capital gains tax upon selling the home.
Consultation with Tax Professionals: Given the nuances and complexities, consulting a tax professional is advisable. Their expertise can clarify what matters on your taxes and what may have implications in the future.
In conclusion, the article emphasizes that, while many home improvements aren't tax-deductible, certain strategic approaches, such as capital improvements, energy-efficient upgrades, and medically necessary improvements, can offer tax-saving opportunities.
