Are Home Improvements Tax Deductible? | Real Estate

But not all home improvements are eligible for tax deductions, and those that do qualify won’t apply to the year you make renovations.

“Now, while most home improvement efforts won’t lower your taxes today, they’re not without their future perks,” says real estate agent Clint Jordan, a veteran and former Air Force fireman who founded Mil-Estate Network, a real estate service for veterans and their families. “If you tackle some major renovations that boost your home’s value, prolong its life or adapt it for a new purpose, you’re essentially making what’s known as capital improvements.” Later, when it’s time to sell, these capital improvements can benefit you and your tax situation, Jordan adds.

Make sure you keep track of all these costs, including receipts, purchase orders and other related documentation, for when you decide to sell your home.

Here are some guidelines for exploring home improvement tax deductions:

Generally, most home improvements, especially cosmetic ones, aren’t tax deductible. However, the IRS does offer some tax benefits for certain capital improvements, such as renovating your home office or a space you rent, making energy-efficient improvements or making changes due to a medical condition.

If you do qualify for tax breaks, you won’t see the benefit immediately. “When you make a home improvement, such as installing central air conditioning or replacing the roof, you can’t deduct the cost in the year you spend the money,” says Roxanne Hendrix, CPA and tax expert with JustAnswer. “But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.”

Most home improvements aren’t tax deductible, but the IRS does specify situations in which you can write off expenses as you improve your home. Here are home improvements that could save you money, either as a deduction or a credit, on your tax bill.

Capital improvements. The IRS defines a capital improvement as one that adds value to your home, prolongs its useful life or adapts it to new users. A capital improvement is tax deductible, but only if the improvement exists for more than one year and remains when you sell the home.

According to the IRS, a capital improvement can be:

Home office improvements. If you use part of your home as your main office exclusively for business, you can typically deduct repairs and maintenance costs. “The amount you can deduct depends on whether the project impacts the entire home or just the office,” explains Courtney Klosterman, home insights expert at Hippo Insurance. The deduction is also categorized similarly to capital improvements and only applies to the percentage of your home that your office occupies.

For example, Klosterman says you could potentially get a tax break if you replace your home office windows with dual or triple-pane windows to help improve insulation and reduce noise. This would also benefit the entire house, but the deduction would only be applied to the percentage of the property the office takes up. If the improvement only benefits your home office, then you can deduct 100% of the cost of improvements.

Landlord home improvements. If you rent out a portion of your home, you can potentially depreciate the expense as a rental expense from the rental income you receive. “Improvements that benefit only the portion of the home being rented can be depreciated in full. Improvements that benefit the entire home can be depreciated according to the percentage of rental use of the home,” Hendrix says.

Medical improvements. You can potentially get a tax break if you make medically necessary upgrades to your home as part of the medical expense deduction. “These include improvements that help make your home more accommodating for a disability that you, your spouse or dependents that live in your home have,” Klosterman says.

The amount you include in the deduction depends on how the improvement impacts the home’s value. Klosterman explains that if your home’s value increases, your medical expense is considered the cost of the improvement minus the increase in home value. If your home’s value doesn’t increase, you can include the entire cost in your medical expense deduction.

Historic home improvements. The federal historic rehabilitation tax credit gives homeowners a tax break if they are renovating a historic home. “Historic homes can qualify for this tax credit and other grants since many organizations wish to preserve historical buildings,” Klosterman says. “Taking advantage of these can help lower the financial burden of potential repairs while helping you maintain your home’s original beauty.”

Per IRS guidelines, the property must be classified as a “certified rehabilitation,” meaning any rehabilitation of a historic structure certified with the National Park Service must be consistent with the historic character of the property or the district where the property is located. The credit is equal to 20% of the qualified rehabilitation expenditures.

Energy-efficient improvements. Homeowners can potentially qualify for the Energy Efficiency Home Improvement Credit of up to $3,200 for energy-efficient improvements made after January 1, 2023. For 2024, the credit is 30% of qualified expenses, but Klosterman says there are limits for different types of improvements.

Energy efficient upgrades, including structural improvements or the installation of new systems, can also reduce your home’s energy usage, strain on critical systems and utility costs, Klosterman explains.

“Some states also offer their own incentive programs, ranging from tax credits and rebates to low-interest loans for energy-efficient upgrades,” Jordan adds. “These can cover a broad spectrum of improvements, from solar installations to HVAC upgrades and even landscaping for water conservation in some areas.”

These rebates could add up to as much as $14,000 and can be combined with income tax credits.

Clean energy improvements. Investments in renewable energy for your home – solar, wind, geothermal, fuel cells or battery storage technology – may qualify you for the Residential Clean Energy Credit. According to Hendrix, the tax credit is 30% of the costs for qualifying, newly installed property from 2022 through 2032. The credit percentage drops to 26% for property installed in 2033 and 22% for property installed in 2034.

The credit applies to your primary residence in the U.S., new or existing. It may also apply to a second home, but you must live on the property part time and cannot rent to others; however, fuel cell property claims don’t apply. “For these upgrades, you can carry forward any excess credit and apply it to reduce the tax you owe in future years. You may not include interest paid, including loan origination fees,” Hendrix says.

The IRS states that the cost of repairs and maintenance necessary to keep your home in good condition, but don’t add to its value or prolong its life, don’t qualify and cannot be included in your basis – the amount you paid for the property plus the cost of capital improvements.

Some examples the IRS gives include painting the interior or exterior of the home, fixing leaks, filling holes or cracks, or replacing broken hardware.

Additionally, costs associated with improvements that are no longer part of the home and costs with a life expectancy of less than one year after installation do not qualify.

There are some exceptions. The entire project is considered a home improvement if items that would be considered repairs are done as part of an extensive remodeling or restoration of the home. For instance, the IRS explains that if you have a casualty (such as a fire or storm) and your home is damaged, then increase your basis by the amount you spent on repairs that restored the property to its previous condition. You must also adjust your basis by any amount of insurance reimbursement you received or expect to receive for losses.

According to Hendrix, the money you spend on your home fits into two categories from a tax perspective: the cost of improvements and the cost of repairs.

“You add the cost of capital improvements to your cost basis in the house,” Hendrix says. Capital improvements increase the cost basis of your property, which reduces your tax burden when you go to sell. “The price you paid for the home will increase in turn reducing your capital gain on the sale of the home in the future,” she adds.

On the other hand, repairs are treated differently and not added to your cost basis. “Although you can’t deduct home improvements, it’s possible in some situations to depreciate them,” she says.

Depreciation means you deduct the cost over several years, typically anywhere between three and 27.5 years, Hendrix says. This also depends on the type of assets. “To qualify to depreciate home improvement costs, you must use a portion of your home other than as a personal residence,” she adds. This typically means using part of your property as a residential rental property or as an office for business.