What Home Improvements Are Tax-Deductible?

What Home Improvements Are Tax-Deductible?

If you’re considering making home improvements or repairs, you should first determine whether any of these upgrades are tax-deductible. Deductions can save you money when filing your tax return. Here, we’ll cover the information you need to know regarding home improvements and repairs to answer your questions and address your concerns before you start the process.

Tax-Deductible Meaning

You can subtract some expenses from your personal or business taxable income, resulting in a lower tax liability. In other words, tax-deductible expenses or contributions reduce the amount of your income that is subject to taxation. Common examples of tax-deductible expenses include: 

  • Business expenses
  • Charitable donations
  • State and local taxes 
  • Specific medical expenses
  • Mortgage interest payments

Not all expenses are tax-deductible, and some deductions may have limitations or restrictions. Tax laws can change frequently, so consult with a tax professional or review official tax guidelines to ensure you accurately claim deductions.

Improvements vs. Repairs

Home improvements and home repairs are two different things, but both are essential aspects of maintaining and upgrading a house.

Home Improvements

Home improvements involve making upgrades or additions to enhance a house’s value, aesthetics and functionality. These can include projects like: 

  • Renovating a kitchen or bathroom
  • installing new flooring 
  • Adding a deck or patio
  • Installing new windows 

The goal of improvements is to enhance the home in some way, whether it’s to make it more comfortable, efficient or aesthetically pleasing.

Home Improvements And Taxes

Home improvements can have tax-related implications. Here are some essential things to remember.

  • Home office deductions: If you use a portion of your home exclusively for business purposes, you can itemize and deduct related expenses. For example, if you convert a spare bedroom into a home office, you may be able to subtract a portion of your mortgage interest or property taxes.
  • Property tax implications: Upgrading your home can increase its value, which can lead to higher property taxes. Before you undertake a significant home improvement project, check with your local assessor’s office to see how the project may affect your property taxes.
  • Capital gains implications: If you sell your home, enhancements made to the property may affect your capital gains taxes. After selling your primary residence, you can exclude up to $250,000 of the gain from your income — or $500,000 for married couples filing jointly — if you meet specific criteria, such as owning and using the property as your primary residence for at least two of the past five years. You can add the cost of any improvements to your basis, reducing your capital gains tax liability.
Medical expense deductions
  • Medical expense deductions: If you make medically necessary home improvements, such as installing a wheelchair ramp or adding grab bars in the bathroom, you may be able to deduct the cost of those improvements as medical expenses on your taxes.
  • Tax benefits for energy-efficient home improvements: You may be eligible for tax credits if you make energy-efficient improvements to your home. For example, if you install solar panels or a solar water heater, you may qualify for the federal solar investment tax credit. Other energy-efficient improvements that could be eligible for tax credits include windows, doors and insulation.

The tax implications of home improvements can be complex and vary depending on the specific circumstances. Consult with a tax professional or financial adviser before making any significant decisions.

Home Repairs

Home repairs typically involve fixing something such as a leaky roof, a malfunctioning air conditioning system or a cracked foundation. The goal of repairs is to restore the home to its original condition or prevent further damage. Home repairs are often urgent and need immediate attention to avoid further problems.

Home Repairs And Taxes

Home repairs generally do not have any direct tax implications. Repairs are part of the routine maintenance and upkeep of your home, and as such, they are not typically eligible for any tax deductions or credits.

However, if you use your house for business purposes, such as if you operate a home-based business or dedicate an area as a home office, you may be able to deduct the cost of repairs as an essential business expense. 

Additionally, if you rent your home to someone else, you might deduct the cost of repairs as a rental expense. These can include essential upkeep that keeps the property in good condition and maintenance to address normal wear and tear.

Some fixes are overall improvements, such as replacing the entire roof or upgrading the electrical system. These are generally not deductible as a current expense, but you may add them to your home’s cost basis and use them to reduce capital gains taxes when you sell.

In general, it’s wise to keep records of any repairs or improvements you make to your home, along with the associated costs. Using these notes, you can determine if you are eligible for any tax benefits. They can also help you calculate your home’s cost basis for tax purposes.

Essentially, repairs are necessary to keep a home in good working order and prevent further damage, while improvements are optional upgrades that can add value and enhance your property’s livability.

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Capital Improvements

Capital improvements are permanent enhancements or additions made to a home that increase its value, improve its functionality or extend its useful life. These investments may be tax-deductible.

Examples of capital improvements to homes include:

  • Building a new garage or carport
  • Adding a room or an addition to the home
  • Installing a swimming pool or outdoor kitchen
  • Upgrading the landscaping, outdoor lighting, insulation, roofing or siding
  • Installing a new kitchen or bathroom or upgrading existing ones
  • Installing a new HVAC system or updating the electrical or plumbing systems
Capital Improvements

Capital improvements differ from routine maintenance or repairs because they involve significant expenses and provide long-term benefits. They can increase your home’s value and make it more appealing to potential buyers if you decide to sell.

Tax Implications Of Capital Improvements

Capital improvements to your home can have tax benefits and consequences. The following are some critical aspects to remember about capital improvements and taxes.

  • Cost basis: Capital improvements are generally upgrades that enhance a home’s value, such as a new roof or an addition. You can add these to your home’s cost basis, which is the original purchase price plus the cost of any improvements. When you sell your home, you’ll use the cost basis to calculate the capital gain or loss on the sale. A higher cost basis can help reduce your capital gains tax liability.
  • Tax credits: Some capital improvements may be eligible for tax credits. For example, if you install some energy-efficient upgrades, such as solar panels or a geothermal system, you may be eligible for a federal tax credit. Other enhancements, such as installing a wheelchair ramp or making other accessibility modifications, may also qualify for tax credits.
  • Depreciation: If you use your home for business purposes, you may be able to depreciate the cost of capital improvements as a business expense. Depreciation allows you to deduct a portion of the cost of the improvement each year over its useful life.

Are Home Improvements Tax-Deductible?

In general, home improvements are not tax-deductible, but there are some exceptions.

If you are making home improvements for medical reasons, such as modifying a bathroom to accommodate a disability, you may be able to claim a tax deduction for the expenses as a medical expense. However, you must meet specific criteria and provide supporting documentation.

Additionally, if you make environmentally friendly upgrades, you may be eligible for tax credits. For example, if you install solar panels, a geothermal heat pump or energy-efficient windows or doors, you may be able to claim a tax credit for a portion of the costs. However, these credits are typically only available for a limited time and have specific eligibility criteria.

Consult with a tax professional to determine if you are eligible for any tax deductions or credits related to home improvements.

Tax Credits For Energy-Efficient Home Improvements

Tax Credits For Energy-Efficient Home Improvements

Tax credits are available for certain energy-efficient home improvements. The following are some examples:

  1. Nonbusiness energy property credit: This tax credit is for homeowners who make energy-efficient improvements to their homes, such as installing insulation, energy-efficient windows and doors, or a high-efficiency furnace or air conditioner. The credit is 10% of the cost of the improvement, up to a maximum credit of $500.
  2. Residential Energy Efficient Property Credit: This tax credit is for homeowners who install renewable energy systems, such as solar panels, wind turbines or geothermal heat pumps. The credit is 22% of the cost of the system and can apply to the purchase and installation costs.

These tax credits have specific eligibility requirements and limitations, and the rules and amounts may change from year to year.

Are Home Repairs Tax-Deductible?

Generally, home repairs are not tax-deductible. The IRS considers home repairs to be a personal expense and, therefore, not eligible for tax deductions. However, in some situations, home repairs may be partially tax-deductible.

If you updated your home for medical reasons, the expenses may be partially deductible as a medical expense on your tax return. Additionally, if you are a landlord maintaining or improving a rental property, the costs may be deductible as a rental expense on your tax return.

If you make upgrades such as adding a new room or renovating a kitchen, those expenses may be eligible for a tax deduction if they meet specific criteria. Home improvements that add value or improve your property’s energy efficiency may qualify for a tax credit or deduction.

Medical Home Improvement Tax Deductions

If you make home improvements for medical reasons, such as adding a wheelchair ramp, modifying a bathroom to accommodate a disability, or installing a lift, you may be able to claim a tax deduction for the expenses as a medical expense on your income tax return.

To qualify for the deduction, the home improvements must be medically necessary, which means a medical professional must prescribe them to treat or alleviate a specific condition.

For example, if your AGI is $50,000, the cost of your medically necessary home improvements must exceed $5,000 to be deductible.

Keep detailed records of the expenses, including receipts and invoices, along with a letter from your doctor outlining the medical necessity of the improvements. You should consult with a tax professional to determine if you qualify for the deduction and how to claim it on your tax return.

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How Home Improvements Impact Insurance Rates

Home improvements can impact insurance rates in a few different ways. Here are some examples.

  • Home additions: Adding square footage or making significant improvements to your home may increase its overall value and replacement cost, which could result in higher insurance premiums.
  • Structural improvements: Making structural improvements to your home, such as adding a new roof or reinforcing the foundation, can make it more resilient to natural disasters and might lower your insurance premiums.
  • Home security improvements: Installing a home security system or upgrading your locks and alarms can reduce the risk of theft or burglary and may decrease your insurance premiums.
  • Swimming pools and trampolines: Installing a swimming pool or trampoline could increase your liability risk and lead to higher insurance premiums.

Notify your insurance company of any significant changes to your property so they can adjust your coverage and premiums accordingly. In some cases, you may need to purchase additional coverage or increase your liability limits to ensure sufficient protection. Learn more about how home improvements can affect insurance.

Financial Benefits Of Home Improvements

There are several financial benefits of home improvements.

  1. Tax credits: Home upgrades such as installing solar panels or making energy-efficient upgrades can qualify for tax credits, which can help offset the cost.
  2. Energy savings: Installing energy-efficient appliances and insulation can reduce your monthly utility bills and save you money on energy costs in the long run.
  3. Increased home value: Enhancing your home can increase its value, which can lead to a significant return on investment and help you build equity.
  4. Reduced maintenance costs: By updating your home, you may be able to reduce your overall maintenance costs in the long run. For example, upgrading your roofing, siding or HVAC system can make them more durable and require fewer repairs over time.

Home improvements can provide short-term and long-term financial benefits and are an investment in your home and future. Track, organize and keep records to prepare for putting your property on the market.

Contact David Pope Insurance Services, LLC, To Learn More

Contact David Pope Insurance Services, LLC, To Learn More

At David Pope Insurance, we can meet your personal and commercial insurance needs. Contact us to learn more about tax deductions and how improving your home can affect insurance.

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