Are Home Improvements Tax Deductible?

Daria Uhlig
sturti / Getty Images
sturti / Getty Images

Owning a home is a great way to build wealth, but it’s also a significant expense. The cost of improvements is only tax deductible in certain circumstances. However, even if you can’t deduct the work you do on your home, the improvements could reduce your capital gains tax if you later sell your home at a profit.

Check Out: What To Do If You Owe Back Taxes to the IRS

What Does the IRS Consider Home Improvements?

The IRS defines improvements as work that adds to your home’s value, prolongs its useful life or adapts it to new uses. Examples of improvements, also called capital improvements, include:

  • Room, deck, porch or patio addition

  • Landscaping and hardscaping

  • Fencing

  • Swimming pool

  • Windows, doors and siding

  • Satellite dish antenna

  • Insulation in attic, walls, floors, pipes and ducts

  • Heating, air conditioning, electrical and plumbing systems

  • Interior modernization, built-ins and flooring

Home improvements exclude routine maintenance and repairs, such as painting walls or replacing a door knob. However, repairs done as part of a larger project are considered improvements for tax purposes. If, for instance, you finish your basement, and as part of the drywall work you also paint the walls, painting is part of a larger improvement project so the IRS would consider it part of the improvement.

When Can You Deduct Home Improvements on Your Taxes?

By law, some home improvements are eligible for tax credits and deductions.

Medical Expenses

Home improvements that serve a legitimate medical purpose qualify for tax deductions. For example, widening a doorway and building a wheelchair ramp would both qualify. You can only claim the medical expense deduction if it exceeds 7.5% of your annual gross income and you itemize your deductions.

Home Offices

Small-business owners who work from home can deduct various expenses, including:

  • Maintenance

  • Improvements

  • Repairs

  • Depreciation

To calculate your deduction, determine the percentage of your home’s area that’s taken up by your home office. Then multiply any deductible expenses related to the whole house by that percentage to find out what you can claim. For example, if your home office takes up 10% of your home’s area and your total roof replacement cost $10,000, then you could take a $1,000 tax write-off — 10% of $10,000.

As another example, if you have your home office and your living room painted, you can deduct 100% of the cost of painting the home office. You can’t deduct any of the cost of painting the living room. That’s because painting is a repair, and repairs to a home office are deductible but repairs to your home are not.

Rental Properties

Improvements you make to a rental property — work that adds to your home’s value, prolongs its useful life or adapts it to new uses — are deductible, but you’ll likely have to depreciate the deduction over 27.5 years, according to an IRS depreciation schedule. Work on a rental property that doesn’t meet the definition of an improvement is considered a repair, and as such, is deductible in the year you make it.

What Home Improvements Are Tax Deductible in 2024?

As part of a broader push to encourage environmental sustainability, the federal government is offering two tax credits to homeowners.

Technically speaking, tax credits aren’t quite the same as tax deductions. A deduction lowers your income before taxes. By contrast, a tax credit is applied directly to your tax liability. If you owe $3,000 in taxes and your energy credits total $3,000 or more, then you will pay $0 in taxes.

Residential Clean Energy Credit

The Residential Clean Energy Credit lets you claim 30% of the purchase price for environmentally friendly appliances and home fixtures installed anytime between 2022 and 2032.

You can claim it every year, with no cap on the dollar amount except in certain unusual circumstances. The credit is only good for your main home, and it’s reduced if you use more than 20% of your home for business.

The credit is nonrefundable, so it can’t be refunded if it reduces your tax owed to less than $0. However, you can carry unused excess credit forward to subsequent years.

Energy Efficient Home Improvement Credit

With this credit, you can claim up to 30% of the price of certain energy-conserving upgrades made between Jan. 1, 2023, and Jan. 1, 2033. This credit does have limits on the amount you can claim each year — $1,200 or $2,000, depending on the improvement — but there’s no lifetime limit on the dollar amount.

The Energy Efficient Home Improvement Credit is nonrefundable. Unlike the Residential Clean Energy Credit, you can’t carry excess credit forward.

Capital Improvements and Cost Basis

Selling your home for significantly more than you paid for it can leave you with a big tax bill on your capital gains. The IRS allows most sellers to exclude the first $250,000 of their profit ($500,000 for married joint filers). Realized profits above that amount are subject to the tax. However, you can use the cost of improvements you’ve made since purchasing the home to reduce that tax by increasing your cost basis.

Generally speaking, cost basis refers to the amount of money used to purchase your house. For example, if you spent $350,000 on your house and resold it for $650,000, then your cost basis would be $350,000, and your profit would be $300,000.

If you spent $50,000 in home improvement expenses over the years, you can add that to your cost basis — which reduces your realized profit. For this example house sale, your adjusted cost basis becomes $400,000 after the improvements, and your profit is reduced to $250,000, all of which you can exclude from capital gains tax.

Final Take

Home improvements aren’t tax deductible in most circumstances. However, if you run a business out of your home or if you’re making environmentally sound or medically necessary home improvements, you might offset those expenses with a lower tax bill at the end of the year. Additionally, it’s worthwhile to hold on to your home improvement receipts in case the profit on the sale of your home strays into taxable territory. While you can’t deduct the receipts directly, you can use them to reduce taxable profits from the sale.

FAQ

Here are the answers to some common questions about taxes and tax deductions.

  • Are moving expenses tax deductible?

    • After 2017, only active members of the armed forces who are moving due to a direct military order may deduct their moving expenses.

  • What home expenses are tax deductible?

    • You can deduct certain medical-related home improvement expenses. If you own a business and work in a home office, you can deduct several expenses from your taxes, proportionally to the size of your home office.

    • Also, energy-efficient and environmentally friendly improvements may qualify you for a tax credit.

  • Which home expenses are not tax deductible?

    • You can't claim tax deductions on payments made to your home's principal. Other nondeductible expenses include depreciation, homeowners insurance, down payments and utility payments.

  • What is the FICA tax rate?

    • The FICA tax rate is 15.3% of your gross wages. The tax is divided between Social Security, which receives 6.2%, and Medicare, which receives 1.45%. If you're a W-2 employee, your employer pays half.

  • Where can I find the 2024 IRS tax brackets?

  • How long does it take to get a tax refund?

    • Most taxpayers receive their refunds within 21 days, according to the IRS, but how long it takes to get your refund depends on whether you request a check or direct deposit (direct deposit is faster) and whether your return requires additional review.

Talon Abernathy contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: Are Home Improvements Tax Deductible?

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