Are Your Home Improvements Tax-Deductible?

Homeownership can be a tad on the expensive side for some people, especially if you have a long list of renovations and repairs you want to complete. Thankfully, owning a home can also come with financial benefits, like home improvement tax deductions and credits. But keep in mind: Not all your projects will necessarily qualify for these write-offs.

Let’s delve into which home improvements you can deduct from your taxes and which ones won’t qualify according to Internal Revenue Service (IRS) standards.

In a number of cases, your home improvements won’t be tax-deductible. However, this certainly isn’t always the case. If you make any renovations or upgrades that can be categorized as a capital, energy-efficient, medical, home office or rental property improvement, you may be able to use the related costs to reduce your taxes. As with any tax decisions, we recommend working with a licensed tax professional to determine whether your home project qualifies for a deduction.

Home Improvements Vs. Home Repairs

While some categories of home improvements are tax-deductible, not all will qualify. Any home improvements you make must do one of the following:

• Add value to the home
• Increase the home’s usable lifespan
• Adapt the home to new uses

If your improvement doesn’t satisfy one of these standards, you won’t be able to deduct the costs. That’s because the change you made might be classified as a repair instead of an improvement. A home repair is any change that keeps your house livable but doesn’t increase the value of your home or prolong its useful life.

For instance, home improvements can include:

• Building a ramp for your front door
• Adding a swimming pool
• Finishing your basement

Home repairs can include:

• Painting and repairing walls
• Replacing broken gutters
• Fixing damaged kitchen cabinets

Home improvement tax benefits can come in the form of a deduction or a tax credit. We’ll review how both options work. 

As A Tax Deduction 

Some types of home improvement deductions increase your cost basis, which is the amount of money you subtract from the profit you make on the sale of your home. This means you can’t take advantage of this tax benefit until you sell your house.

For example, let’s say you bought your home for $300,000 and sold it 10 years later for $500,000. If you have records showing you made $60,000 worth of improvements over the period you owned the home, you could find your cost basis by:

1. Adding your renovation costs to the amount you paid for your home. So, here it’s $60,000 + $300,000 = $360,000

2. Subtracting that amount from the sales price. So, it’s $500,000 − $360,000 = $140,000. Your cost basis will be $140,000 and subject to tax.

According to the IRS, the first $250,000 of profit from the sale of a personal residence is tax-free for homeowners filing by themselves, while the first $500,000 is tax-free for homeowners filing jointly. Any money over these thresholds may be subject to the capital gains tax.

Using the example above, since your profits are under the $250,000 cutoff, you won’t need to pay the capital gains tax.

If you still have questions about how your cost basis works in relation to the capital gains tax, talk with a tax professional.

As A Tax Credit 

Home improvement tax credits work differently than a deduction. A credit can immediately reduce the amount of taxes you owe without adjusting your cost basis. Once you calculate the dollar amount of taxes owed, you can subtract your tax credits.

For example, let’s say you owe the IRS $1,000 on your 2022 taxes. Let’s say you also qualify for up to a 30% credit thanks to some energy efficient improvements you made to your home. The credit can be applied to your 2022 taxes to reduce your tax liability, or what you owe to the IRS.

Tax credits fall into two categories: refundable and nonrefundable. A refundable tax credit reduces your taxes owed and can increase your refund. A nonrefundable tax credit reduces your taxes to $0, even if your tax credit is more than you owe. This means you won’t receive a tax refund. 

If you completed any home improvements in 2022, you may be wondering which projects you can use to lower your taxes. To take advantage of a home improvement deduction or tax credit, you must have thorough records of the home improvements and their respective costs. Your project must also fit into one of the categories we’ll discuss next.

Capital Improvements

A capital improvement is any home renovation or remodeling project that increases property value, extends the home’s usable life or alters the use of the home. It’s worth noting, too, that capital improvements can be permanent or semi-permanent.

A capital improvement deduction will increase your cost basis and, therefore, lower your taxes. In other words, this deduction isn’t a tax benefit you can claim the year you complete the project. Instead, you can only use this deduction when you sell your home.

Energy-Efficient Home Upgrades

If you’ve made any home upgrades that improve the home’s energy efficiency, you may qualify for a federal tax credit. For example, you can claim solar panels, new windows, more efficient appliances, solar water heaters and geothermal heat pumps on your yearly tax return.

However, energy-efficient improvements can only qualify if you made them on a personal residence. This type of tax credit is nonrefundable.

Medically Required Renovations

Renovations that are required to accommodate someone’s medical condition can also lower your taxable income as a deduction. If you constructed ramps, widened doorways, installed medical equipment or added handrails, you may use a full deduction as long as those changes didn’t increase your home’s value. If the improvements increased the value, you’ll probably only qualify for a partial deduction.

It’s also important to note that any expenses reimbursed by your health insurance company won’t qualify. But if you paid for the renovations out of your own pocket, consider asking your tax preparer if you can deduct the costs from your taxes based on IRS rules.

Home Office Updates

Self-employed homeowners who use their property as a part of their business can reduce their taxes with deductions if they made home office improvements. Any qualifying home office cost can be deducted as a percentage.

To illustrate, suppose you only use your garage as a workshop for your carpentry business. In this case, you could deduct 100% of your garage improvement costs. Or if you use 10% of your house for your business, you could deduct 10% of your home’s improvement costs.

Rental Property Improvements

Similar to the home office deduction, you can reduce your taxes with improvement costs if you rent out a part of your home.

Typically, repairs and renovations on rental properties function as a same-year tax deduction. However, if your rental property is also considered personal property, it might qualify as a home improvement deduction instead. Talk with a tax professional to learn more about this type of tax benefit.

Do you want to know more about home improvement deductions? See the answers to some frequently asked questions.

Which home improvements qualify for a tax break?

Several home improvements aren’t tax-deductible, but quite a few are. If you make capital, energy-efficient, medical, home office or rental property improvements, you may be able to lower your taxes with a deduction or credit.

Do I need to hire a tax professional to help me claim a home improvement deduction?

You don’t have to hire a tax preparer to claim home improvement deductions or credits. However, using a professional helps you prepare your return more efficiently and can maximize your potential savings.

What do I need to claim a home office deduction?

To qualify for a home office deduction, you need to regularly and exclusively use your home or part of your home as your place of business. If you meet one of these criteria, you can deduct specific expenses, such as mortgage interest, insurance, utilities and depreciation.

Understanding which home improvements are tax-deductible and the costs you can claim on your taxes can help you reduce the costs of homeownership. If you’ve made certain renovations, decreasing the amount you’ll pay in taxes is a real possibility.

Interested in getting your tax refund faster? Learn more about tax refund loans.

Disclaimer: Rocket Loans does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.