Are There Tax Breaks Available for Home Improvements?

Your property taxes could go down if you make certain improvements to your home. While it's true that home is where the heart is, that doesn't necessarily mean it's where the biggest tax breaks are. Capital improvements, improvements that are energy-efficient, and improvements that are related to medical care are the three main exceptions to the rule that home improvements are not tax-deductible. In general, home improvements are not tax-deductible. If you have recently made improvements to your home, you may be eligible for certain tax deductions or credits; the following information will walk you through the process.

Key Takeaways

  • With a few notable exceptions, the majority of home repairs and renovations are not tax-deductible.
  • The cost basis of your home could go up if you make improvements to it, which would result in a lower tax bill for you in the event that you made a profit when you sold it.
  • Improvements to your home's energy efficiency may entitle you to a tax credit from the federal government; in addition, depending on the state in which you reside, they may reduce the amount of state or local taxes you owe.
  • Home improvements made for medical reasons qualify as a tax deduction in the same way that other medical expenses do.

Capital Improvements and Taxes 

The addition of something to a home's value, the extension of its useful life, or the modification of a home so that it can be put to a different purpose are all examples of capital improvements. These enhancements have the potential to reduce the amount of tax that must be paid on the profit made from the sale of a home in certain circumstances. To begin, however, it is essential to have a solid understanding of the categories of improvements that can be counted as capital improvements. The following types of projects are considered to be examples of capital improvements, as outlined by the Internal Revenue Service (IRS): Systems: Heating, central air conditioning, furnace, ductwork, central humidifier, central vacuum, air and water filtration, wiring, security, and sprinkler systems are some of the systems that can be installed. Additions: Rooms include a bathroom, deck, porch, patio, and garage. The grass and the grounds: The swimming pool, along with the landscaping, the driveway, the walkway, the fence, and the retaining wall. Exterior: Storm windows and doors, a new roof or siding, and a satellite dish are all exterior features. Insulation: Attic, walls, floors, pipes, and ducts should all be insulated. Plumbing: Septic system, water heater, soft water system, and filtration system are all components of plumbing systems. In the interior, there are built-in appliances, a modernised kitchen, updated flooring and wall-to-wall carpet, and a fireplace. Because they increase the value of your home, capital improvements can help you reduce the amount of money you have to pay in taxes when you make a profit from the sale of your home. This is accomplished by increasing the basis of your property. The basis of a property is the amount of initial capital investment that was made in the purchase of that property. When you sell your home and bring in more money than you expected, you will have realised a capital gain that is equal to the amount of money you made from the sale. As a general rule, you won't be required to report a capital gain on the sale of your home during the tax season if you satisfy certain primary residence requirements, you've owned the home for at least five years, and the profit is less than $250,000 (or $500,000 for married taxpayers filing jointly). This applies to both single taxpayers and married taxpayers filing jointly. NOTE: If you are subject to taxes, you can reduce the amount of tax on your capital gains by deducting the basis (capital investment) from the revenue from the sale of the asset.

Capital Improvements vs. Repairs 

Even though the owner of a property who invests their time and money into making repairs might consider those improvements to be capital improvements, the Internal Revenue Service (IRS) is not required to recognise them as such. In an email to The Balance, Mark Steber, chief tax information officer at the tax preparation company Jackson Hewitt, stated that home repairs such as fixing gutters or painting a room are considered general maintenance rather than capital improvements. However, if the repairs were performed as part of a larger project, such as a comprehensive renovation or restoration endeavour, then they could be considered capital improvements. One common example of a repair is the installation of a new pane of glass in a window that has been broken. If, on the other hand, you are replacing a windowpane as part of a much larger project that involves replacing all of the windows in your home, then it is possible for this to count as an improvement.

Credit for Taxes Payable on Energy-Efficient Home Improvements 

You might be eligible for the residential energy-efficient property credit if the energy-saving upgrades you've made to your house meet the requirements outlined in the credit's guidelines. Homeowners are eligible to receive a tax credit that is equal to a certain percentage of the cost of "qualified property" thanks to the existence of this tax credit. In this context, the term "qualified property" refers to the following categories of energy-efficient appliances:
  • Solar electric
  • Solar water heaters and boilers
  • Heat pumps that use geothermal energy
  • Windmills on a smaller scale
  • The use of fuel cells is restricted to a maximum of $500 for every half kilowatt of capacity.
The chart that follows provides details on what percentage of the cost of home improvements are eligible for deductions based on the year in which the improvements were made.
If the Property Was Placed in Service Percentage of Cost That Qualifies
After December 31, 2016, and before January 1, 2020 30%
After December 31, 2019, and before January 1, 2023 26%
After December 31, 2022, and before January 1, 2024 22%

Home improvements made for medical reasons are eligible for a tax deduction

There are some home enhancements that can be deducted from your taxes because they are considered medical expenses. If the primary objective of a home improvement project is to facilitate the provision of medical care for you, a dependent of yours, or your spouse, you may be able to deduct the cost of the project from your taxable income as a medical expense. If a permanent improvement you make to your property results in an increase in the property's value, you might be able to count that improvement as a capital improvement. NOTE: A tax credit is not the same thing as an itemised tax deduction. When you claim a deduction, the amount of the deduction is subtracted from your income before you figure out how much tax you owe; when you claim a tax credit, the amount of the credit is subtracted from the tax that you owe. To accomplish this, you will deduct the rise in the value of your home from the amount that it cost you to make the improvement. The difference that is still owed can be added to the patient's medical bills. In the event that the improvement does not result in an increase in the value of your property, you are able to deduct the total cost of the home improvement as a medical expense.

According to the Internal Revenue Service, the following types of home improvements qualify as examples of medical expenses:

  • Installing Ramps at Entrances and Exits
  • Increasing the width of the doorways at the entrances and exits of the building, as well as modifying the hallways and doorways inside the building
  • Putting up guardrails or support bars in public restrooms
  • Bringing kitchen cabinets down to a lower level makes them easier to reach.
  • Making adjustments to the fire alarms and smoke detectors
  • Adding handrails or grab bars
  • Modifying stairways
NOTE: Home improvements that are made solely for the purpose of improving the home's appearance are not eligible for this deduction. For the improvement to be considered medical care, the home must be adapted to the needs of the disabled individual. This deduction only applies to costs that can be considered reasonable.

The Crux of the Matter 

Steber advised keeping careful records of all the money spent on home improvements, even though it's possible that those expenditures won't be deductible on your taxes. According to Steber, "They can be important when the time comes to sell or when disaster strikes, whether it be natural or otherwise." "If you have any issues with expenses or improvements, whether personal or business, it is best to practise to consult a tax pro to find out what matters on your taxes and what matters later," the best practice reads. "If you have any issues with expenses or improvements, it is best practice to consult a tax pro." In general, home improvements are not deductible for tax purposes; however, there are some opportunities to save money on taxes that should be taken into consideration. When selling a home, making improvements to the home's capital assets can help reduce the amount of money paid in capital gains tax. In addition, certain improvements, such as those related to medical care or energy efficiency, may result in tax benefits.

Questions That Are Typically Asked (FAQs) 

Why should I keep financial records if the money I spent on renovating my home is not tax-deductible? 

It is possible that you will not receive a tax break for remodelling your home; however, any improvements that add to the value of the home will be taken into account when the capital gains tax is calculated. If you were to sell your house at some point in the future, you would have a higher basis to work with, which would allow you to offset some of the income from the sale.

If I own a rental property, can I deduct any home improvements I make? 

Despite the fact that you might be tempted to consider home improvements for a rental property to be a form of business expense, the Internal Revenue Service does not permit you to deduct these costs from your overall tax liability. If you have a rental property and use it as a source of income, you may be eligible to deduct certain costs associated with running the business on a day-to-day basis. These only cover routine maintenance and upkeep; they do not include any kind of remodelling or other improvement work.

Which kinds of residential renovations qualify for the greatest tax deductions? 

Your individual tax situation will determine which home improvements offer the greatest potential return on investment from a tax perspective. On the other hand, many states and even the federal government offer financial incentives for residents who make energy-saving improvements. For instance, residents of California who install solar panels on their homes are eligible for a federal tax credit, and a state rebate, and there is a possibility that they will also receive a break on their property taxes.  

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