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:
- An addition to your home, such as a bedroom, bathroom, deck or garage.
- Landscaping.
- Exterior upgrades, such as a new roof, new siding, storm windows or doors.
- Insulation added to the attic, walls, floors, pipes and ductwork.
- Home system improvements, including an HVAC system, furnace, ductwork or security system.
- Plumbing upgrades, including the septic system, water heater or filtration systems.
- Interior improvements, such as built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting or fireplace.
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.
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Key takeaways
- A certificate of occupancy is a legal document that proves a property is safe to inhabit and meets all code and usage requirements.
- It is often required for major home renovations or when selling a property.
- The process and cost of obtaining a certificate of occupancy can vary widely depending on your location.
It’s natural to want to make sure a home is safe to live in before you buy it. Luckily, in many places, there are regulations and mandatory disclosures home sellers must comply with to make sure buyers are informed. In some municipalities, this means having a certificate of occupancy (often abbreviated to CO). Effectively, it’s a special permit legally declaring that a property is habitable and meets all code and usage requirements.
Let’s take a deeper look at certificates of occupancy, including when you need one, where to get one and how much they cost.
What is a certificate of occupancy?
A certificate of occupancy is a legal document that proves a structure, such as a house or office building, is safe to inhabit. In addition to the property address and owner, a certificate of occupancy will include the following three things:
- Description of specific legal use and type of property: This indicates what the property is classified as from a zoning perspective, such as whether it’s zoned for residential, commercial, industrial, retail or mixed-use purposes. It ensures the property is being used as intended.
- Verification that the property is up to code: This serves as proof that the property is in compliance and up to date with housing and building codes.
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Confirmation that the property is suitable to be occupied: This confirms that the property conforms to the codes and standards set by your municipality, and the structure is fit for occupancy. Without a CO, the property cannot be legally occupied.
When you may need a certificate of occupancy
If you’re sprucing up your home to get it ready to sell, or if you’ve bought a fixer-upper that needs work, whether or not you need a new certificate of occupancy will depend on the scope of the projects. In general, minor home renovations will not require a new CO to be issued. However, there are a few home-improvement scenarios when one is likely to be required, depending on local rules and regulations. These include.
- Major renovations: When you make significant changes or improvements to a property — for example, fixing up a home that had been condemned, or even just completing an addition — you’ll likely need to obtain a certificate of occupancy before you can sell it. That’s in addition to needing a building permit upfront.
- Changing the property type: Every type of residence, such as a condo, multifamily or single-family home, has its own permitting and records that detail the type of property to ensure it is used the way it was intended. (The same goes for commercial properties.) Owners who get a permit to convert their property to a different class will need a certificate of occupancy indicating the change. For example, if you’re building a basement apartment that converts a single-family home into a multifamily one, you’ll need to get a CO after the work is completed to reflect that.
- New-construction property: A certificate of occupancy is required as part of the sale of any brand-new home or building.
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A new owner or occupant: Some municipalities require a new certificate of occupancy each time you sell a property, or when a new tenant moves into a rental property. To ensure you’re following regulations, check with your local building or zoning authority.
How to get a certificate of occupancy
To get a certificate of occupancy, contact your local building or zoning inspection office and ask what documentation you’ll need to provide. In most cases, the information will be posted on your local government’s website. Some areas have much more stringent regulations than others.
Typically, your municipality will send an approved inspector to check out fire safety, electrical wiring and plumbing systems, plus any general additions, such as doors and exits. These will be assessed against building codes to determine if there are any violations. Whoever applies for the certificate must be present for all required property inspections.
Once an inspection has been completed, you’ll receive a report that outlines the details of your property and whether you pass. If so, you can claim your certificate and are free to sell the property. If not, you’ll receive a list of issues that need to be addressed before the sale can be completed. Your municipality will decide how much time you’ll be given to complete repairs. Then, you’ll need to complete another CO inspection in order to move forward.
How much does a certificate of occupancy cost?
Because different municipalities operate differently, the fee to get a certificate of occupancy varies significantly from place to place. For example, in Tamarac, Florida, it costs $260 for a safety permit, then $89 plus $3 for every 1,000 square feet of space in the building. Compare this to West Chicago, where it costs $100 plus an additional $0.12 per square foot of floor space. The cost, which is typically paid by the seller, also depends on the size and type of property.
Bottom line
Getting a certificate of occupancy can be a lengthy and expensive process, especially if you need multiple inspections. Rules around them vary significantly from market to market, and one may not even be needed in your local market. But in areas where they’re required, they’re non-negotiable. If you’re unsure whether you need one or not, ask your Relator or a local real estate attorney.
It’s been one of the most challenging years on record for the housing market, with rock-bottom inventory and mortgage rates hitting highs not seen in the past two decades. If you’ve been hoping to buy or sell in the new year, you’re probably wondering if we’ll ever see any relief.
While we’re likely not entirely out of the woods yet, Zillow® economists predict 2024 will bring improvement on several fronts, including affordability. “This is our breather year,” Zillow Chief Economist Skylar Olsen says. “I expect the beginning of a long healing process to kick off in the housing market next year.”
What will this look like? For one, although homes will remain expensive in 2024, Olsen says, you’re likely to have more to choose from as sellers adjust to higher mortgage interest rates and list their homes in greater numbers.
Read on to learn what else our economists are expecting for the coming year, and what to know whether you’re buying, selling or renting.
1. Home buying costs will level off
After a year in which mortgage rates hit highs not seen in 23 years, buyers in 2024 are expected to get a little relief.
No one can predict what will happen to mortgage rates, but high inflation — which drove interest rate hikes in 2023 — continues to drop toward the Federal Reserve’s target. If the trend continues as expected, it would likely mean less volatility in mortgage rates. Meanwhile, wages continue to grow and home values are expected to remain stable, falling only 0.2% in 2024.
The combination of bigger paychecks, stable home prices and less volatile mortgage rates should provide breathing room for buyers struggling with affordability.
2. More homes will be listed for sale
After a year of low inventory, the housing market is finally getting more choice again. More sellers are expected to list their homes for sale as they come to terms with the fact that we appear to be in an era of higher mortgage rates.
A majority of mortgage holders (80%) are paying less than 5% interest on their home loan, having locked in the rates when they dropped to historic lows in 2021. Zillow research found that many homeowners who might otherwise sell were reluctant to do so because it would mean having to pay higher rates on their new home.
Any increase in listings will no doubt be welcome news if you’re shopping for a home. Not only will you have more options, but an increase in listings could help ease competition in the market, which in turn could help keep prices from climbing.
3. The new starter home will be a single-family rental
Would-be home buyers are looking for ways to get the amenities they want, whether that’s a private backyard or more privacy, even if a home purchase is out of their budget right now. Single-family home rentals answer that call, and are expected to become the new “starter home” as families rent for longer.
Given the expected demand for single family homes, some of the homeowners who have been thinking of selling could become landlords instead, boosting the number of single family homes for rent. New buyers could become landlords, too, as they look for ways to lower the cost of housing.
A recent Zillow survey found that 39% of recent home buyers say it’s very or extremely important that they have an opportunity to rent out part of their home for extra income while living in it. That desire is even higher among younger buyers: 55% of millennial and 51% of Gen Z homebuyers expressed the same sentiment in the survey.
4. Expect stiff competition for rentals near downtowns
Suburban rent growth still outpaces urban rents in 33 of the 50 largest metro areas in the U.S.* but the gap is narrowing, especially in areas with easy access to downtown office hubs. This is likely due to workers returning to downtown offices, and people seeking out amenities they might have avoided during the height of the pandemic.
In New York City, for instance, rental demand is surging in areas with easy access to Downtown or Midtown Manhattan, while areas farther from these neighborhoods are seeing relatively less demand, according to data from StreetEasy, Zillow Group’s New York City real estate marketplace.
Zillow economists predict other urban markets will follow suit. The good news for renters: A multifamily construction boom in 2023 brought a huge number of new rentals to the market, giving renters more options and increasing the likelihood that landlords will offer concessions to attract and keep them.
5. “Fixer” homes will become more attractive to traditional buyers
Homes in need of “TLC” are usually the target of “home flippers,” who remodel or spruce them up in hopes of quickly turning them for a profit. But higher home prices have made flipping harder to pencil out, so buyers looking for a primary home could face less competition from flippers than they might have in previous years.
This could be good news if you’re in the market for a fixer, which can be a great option if you’re buying your first home. Fixer-uppers are usually priced lower than comparable homes that don’t need work and could give buyers an opportunity to make improvements over time.
“Zillow data finds homes that need a little TLC sell for 3.1% less than similar homes,’’ says Zillow home trends expert Amanda Pendleton. But, she adds, “The lack of housing inventory is keeping prices elevated for all homes, even those that need work. Buyers have few options and may still have to compete for the few homes that are available, which can lead to higher sale prices.”
The question for buyers, she says, is whether the lower price is enough to cover the costs of improvements you may want or need to make after the sale closes.
When buying a fixer, it’s important to get an inspection so you know what you’re getting into. An outdated bathroom may bug you, but it’s not likely to pose the same risk as a termite-eaten support beam.
6. More home improvements will be done by homeowners
DIY is expected to get even more popular as home buyers squeezed by home prices and interest rates seek to improve their homes instead of moving. If you’re one of them, now might be a good time to get acquainted with your friendly neighborhood tool library and salvage businesses.
If you’re on the fence about what home projects you’re equipped to tackle, check out this article.
7. Home buyers will seek out nostalgic touches and sensory pleasures
Some of the trends we’re seeing in home design are centered around wellness and nostalgia.
Sensory gardens, Murano glass chandeliers, painted murals and cold plunge pools, are showing up in more listings, according to a Zillow analysis of home features and design styles mentioned in for-sale listing descriptions.
The brutalism design style, featuring things like concrete floors, is also making a comeback, and with pickleball becoming a national obsession, more listings are mentioning pickleball — likely highlighting their proximity to a court as a selling point.
8. Artificial intelligence will enhance home search and financing
Expect artificial intelligence to open new experiences for home buyers and sellers and their agents.
“Artificial Intelligence is already making the home buying and selling process easier through automation, personalization, and self-service,’’ says Josh Weisberg, Zillow’s senior vice president of artificial intelligence. “We expect to see an increase in tools and products that make home shopping more streamlined.”
For example, shoppers can now use a new AI-powered search feature called Natural Language Search to find homes on Zillow in the same way you might text friends and family, like “open house near me with four bedrooms.” AI also allows sellers to highlight their home’s best features and gives buyers a deeper understanding of a home before they ever step inside with panoramic photos that can be used to generate 3D Home Tours and interactive floor plans.
And, of course, there’s the Zestimate, which provides a starting point to understand what their home is worth, and uses deep learning techniques to capture market trends on a national level.
Expect more of those types of experiences in the future.
* Year-over-year changes, as of October 2023.