Can You Deduct Home Improvements on Your Taxes?

Everyone would love to lower their tax bill and owe less money to the IRS. But did you know that you can write off home improvements on your taxes? The good news is that some home improvements can reduce your tax liability. For example, home upgrades that add value to your property, improve energy efficiency, or adapt for medical purposes are tax deductible.

Of course, not all home repairs can reduce your tax liability. And there are limits on how much you can claim on your tax return. But capital improvements to your home qualify you for a tax deduction or tax credit.

Like most tax laws, the rules for writing off home improvements can be complicated. Therefore, the purpose of this article is to demystify the complexities when writing off home improvements on your taxes.

Before learning about the home improvement tax deduction, there are a few things to keep in mind. First, the rules can change from year to year. Therefore, you should talk with a tax advisor about how much you can write off on taxes. In addition, your income level can also affect the home improvement deduction.

But before submitting all your receipts from Home Depot to the IRS, it’s important to know what is considered a home repair — a non-deductible expense — and a home improvement — a tax-deductible expense.

What is considered home repair?

Home repairs are part of routine maintenance and upkeep. Common home repairs include fixing plumbing leaks, patching drywall, replacing appliances, or repainting walls. Unfortunately, typical home repairs are considered ordinary expenses and are ineligible for tax deductions. What is the reason? They cannot increase your cost basis when you sell your home.

Here’s a list of common home repairs that don’t affect your taxable income:

• fix broken gutters
• roof repair or fixing broken shingles
• replace broken window
• furniture replacement or repair
• hvac system repair
• renovating a bathroom
• Replacing or Restoring Damaged Siding
• refinishing a broken driveway
• building a new patio

The only exception to the above list is if you have a home office where you run the business. However, strict limits exist on how much you can write off on taxes.

What is considered a home improvement?

Home improvement expenses that you can include on your tax return must be related to capital improvements. They either make improvements to your home on a cost basis, increasing its value, improving energy efficiency, or making the home suitable for medical care.

Which Home Improvements Are Tax Deductible? Here are five areas where improvements or adaptations to your property could result in potential tax exemptions for homeowners.

1. energy efficient home improvement

Energy-efficient improvements are a common tax deduction for homeowners. According to IRYou can deduct between 22% and 30% of the cost of installing approved appliances and equipment that promote energy efficiency.

Energy incentive home improvements may include the following upgrades:

• installation of solar power systems
• geothermal heat pump
• installing or repairing insulation
• installing a new furnace
• biomass fuel stove
• small wind turbine
• Energy efficient heating and air conditioning systems

Certain energy-efficient improvements such as air-source heat pumps, water heaters and circulating fans allow a tax credit of 10% up to a total cost of $500.

2. home improvements to increase resale value

Any capital improvements that increase the resale value of your home can be included when you file your tax return. Which home improvements are tax deductible in this case? Here are some examples of capital improvement projects:

• make attic or basement livable
• increasing the number of bedrooms or bathrooms
• Replacing the HVAC system with an energy-efficient system
• addition to property
• installing a swimming pool
• installing storm windows or doors

It’s good to know that the deduction for home improvements that increase resale value only applies when you sell your home. The gain on the house is called the “tax basis”. You can then use the deduction to reduce your liability for capital gains tax.

3. home improvement related to medical care

It is possible to make home improvements while adapting to medical care. For example, installing special equipment, stair climbing, bathroom modifications, or allowing wheelchair access are all eligible tax deductions. In addition, the IRS states that these medical expenses Can be for you, your spouse or a dependent.

Other examples of allowable medical deductions include the following:

• Lowering Kitchen Cabinets to Make Them More Accessible
• medical equipment
• door extension
• Modifying smoke detector and alarm systems
• modifying electrical outlets
• grab bars anywhere in the house
• Installing air conditioning to improve the condition of respiratory diseases

The tax rules on the cost of improvements say that you can deduct medical expenses only if they exceed 7.5% of your adjusted gross income. There are also state limits on the deduction for medical expenses.

What happens if home improvements for medical care add value to the resale value of the home? In that case, you can take a partial deduction when writing off the home improvements in the tax years when the upgrade occurred.

4. home improvement for the home office

You can write off home improvements at your primary residence on taxes related to your home office. To be eligible for the tax break, they must be part of your home, your “principal place of business.” This can be a part of your home (like a converted bedroom) or a separate structure (like a converted garage).

How do tax deductions for home office improvements work? The IRS allows you to deduct the percentage of your home that contains office space. For example, let’s say your home is 2,550 square feet and your office is 180 square feet. In that case the home office deduction is 7.06% of the improvement cost.

Unfortunately, if you’re a W2 employee working from home, you can’t claim a home office upgrade as a business deduction.

5. Make repairs if you rent a portion of your home

You can claim a tax deduction on repairs to a rental property but not on home improvements. This applies even if you rent out a portion of your home. However, it is not easy to differentiate between home repairs and home improvements in a rental property or the rental portion of your home.

The only way to write off home improvements to a rental property is to depreciate the expenses. That way, you can gradually recover part of the repair cost. Therefore, you should speak to a tax advisor before filing a return with deductibles for rental property.

how to depreciate home improvements

You can claim a depreciation deduction if you use part of your home for business – a home office or part of a property you rent out. Depreciation is a way to claim for wear and tear and significant improvements. Depreciation can cover up to 100% of the improvement cost under these circumstances.

Let’s say home office improvements benefit the whole household. In that case, you deduct the percentage of the property used for business purposes. In addition, you can depreciate the rental expense against the rental income. As always, with these tricky areas of a tax return, you should seek the advice of a tax professional.

home repair vs home improvement

The primary difference between home improvements and home repairs is that repairs generally keep the home in good condition, whereas improvements increase the market value. For example, a fresh coat of paint won’t add monetary value to a home. However, additional construction will increase the selling price.

Are Home Repairs Tax Deductible?

Generally, you can only include home repairs as a tax deduction if they are for the part of your home that is used to run a business. In this case, the cost of repair is depreciated. So, before making major repairs, research whether they can be classified as improvements. It’s also a good idea to save all payment records and documents.

Can You Write Off Home Improvements on Your Taxes? The answer is yes. Therefore, it is important to keep track of all capital improvement expenses.

However, not all deductions can be itemized in the same tax year. For example, home improvement costs related to improving energy efficiency or adapting the home for a medical condition can be filed in the same tax year. But permanent improvements that boost resale value only provide tax benefits when you sell your home.

Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.