What home improvements are tax-deductible?
Several types of home improvement projects are tax deductible, but it ultimately comes down to the type of remodeling you’re doing and whether it’s a repair or an improvement.
People are always looking for tax breaks when tax season arrives. Let’s take a look at some tax breaks for homeowners that you might be able to take advantage of.
Home Improvements vs. Repairs
According to the IRS, a repair is any modification that returns a home to its original state and/or value. Except for home offices and rental properties that you own, home repairs are not tax deductible. Some examples of home repairs include replacing broken window panes, repairing a leaking faucet, patching a hole in the carpet, replacing broken hardware, or replacing a few broken roof shingles.
Any modification that raises the value of your home is considered a home improvement. Examples of improvements include installing a new driveway, a new roof, new siding, attic insulation, a new septic system, or built-in appliances, according to TaxSlayer. Most home improvements are tax deductible, but some are only deductible in the year the home is sold.
For example, if you made a home improvement in 2018 and sold it in 2022, any deductions you might be entitled to would be recognized on your 2022 tax return. Even if you don’t intend to sell your home in the coming year, it’s critical to meticulously document any tax-deductible home improvements so you have the information readily available when the time arises to utilize those deductions.
Tax Deduction vs Tax Credit
In some instances for Home Improvement Deductions, you may be eligible for a tax deduction and in other cases, your home improvement(s) may be in the form of a tax credit. A tax deduction lowers your taxable income amount, while a tax credit takes a set amount right off the taxes you owe. For example, if you make $50,000/yr and get a $1000 tax deduction, the IRS is only taxing you on $49,000. The amount you get back depends on your tax bracket. If you get a $1000 tax credit, you’re still being taxed on $50,000, but you get to take $1000 off the amount you owe Uncle Sam.
Home improvements can also be deducted as medical expenses from your income if they are medically necessary.
If you or someone in your home has a medical condition that requires some sort of remodeling, the cost of that project may count as a tax deduction, providing the costs equal 7.5% or more of your adjusted gross income for that year. Some examples of such projects are adding wheelchair ramps, installing bathroom handrails, widening doorways, installing air filtration systems, or a therapeutic hot tub. It should be noted that a doctor’s recommendation is usually required stating the specific condition associated with the medical home remodel.
- Ramps at the building’s entrance and exit
- Enlarging corridors and doorways
- Kitchen cabinet lowering or modification
- Adding lifts from one floor to another
- Installing bathroom support bars
- Changing the settings on fire alarms and smoke detectors
Making a home wheelchair accessible qualifies, but adding a sculpture garden does not. Furthermore, any money spent on home improvements that increase the value of your home cannot be claimed as a medical expense.
Home Office Deduction
One way to depreciate home improvement costs is to run a business and use a portion of your home as an office. To be eligible for the home office deduction, you must have a legitimate business and use a portion of your home entirely and on a regular basis for business purposes.
If you qualify for this deduction, you can deduct 100 percent of the cost of home office improvements. For example, if you use a bedroom in your residence as a home office and hire a carpenter to build built-in bookcases, you can deduct the entire amount as a business expense.
Improvements that benefit your entire house are subject to depreciation based on the percentage of time spent in the home office. For example, if you use 20% of your home as an office, you can depreciate 20% of the cost of replacing your home heating and cooling system.
Energy-Efficient Tax Credits
Home improvements and upgrades to increase your home’s energy efficiency are very specific. It is important to remember that only the cost of the products you are installing is eligible and not the additional installation cost. The following are examples of energy-efficient improvements which provide a tax credit of 10% of cost up to $500 and expire on 12/31/22: energy-efficient doors/windows, insulation, air-conditioning of heating, non-solar water heaters, metal or asphalt roofing, or purchasing a biomass stove. Larger tax credits that provide 30% of the cost and extend until 12/31/22 include: geothermal heat pumps, solar panels or water heaters, wind energy systems, and fuel cells.
It’s sometimes difficult to keep up track of all the tax breaks you may qualify for since there are federal regulations, state regulations, and even separate utility rebates available in some cases. Before you purchase any new items to upgrade your home, you can research more information by visiting the Tax Incentive Assistance Project.