Did you know that some of your home improvements are tax-deductible?
A home improvement project increases the value of your home. Projects such as bathroom remodels, carpet replacements, and cabinetry upgrades are examples of home improvements.
Read about the average cost of remodeling your bathroom.
You can potentially score tax benefits on improvements that:
- Install energy-efficient systems and appliances
- Fulfill medical purposes or improve your home’s accessibility
- Increase your home’s value before selling
- Update a home office for a small business
A tax deduction reduces your taxable income and, thus, the amount of money you owe. Whether you’ve done work on a home for personal use or business purposes, those qualifying deductions may shave a few dollar signs off your final owings.
Some homeowners opt for a standard deduction, which is a flat amount the government lets you take off what you owe. Itemized deductions allow you to list the various expenses you incurred that exceeded the standard deduction amount. For some homeowners – especially those who have completed costly home improvement projects – itemized deductions can save them more money.
Before including any deductions on your tax forms, ensure they’re for qualifying home improvements – not home repairs. Home repair projects restore parts of your home to their original state or return them to working condition. These projects aren’t eligible for tax deductions.
Home Improvements To Write Off on Your Taxes
Now that you understand what a home improvement is, we’ll dive into which ones are tax-deductible. If you’ve already completed some of these projects or plan to in the next tax year, you may be able to score some serious savings.
Energy-efficient Improvements
You can get tax credits for installing energy-efficient systems and appliances in your home. A couple of examples are the tax credit for solar energy and the HVAC tax credit. A tax credit reduces the amount of money you owe come tax season. For example, if you owe $8,000 in taxes and qualify for a $500 tax credit, you’ll only have to pay $7,500.
The Internal Revenue Service (IRS) lists the following home improvements eligible for energy-efficient federal tax credits:
- Solar electric systems
- Solar-powered water heaters
- Geothermal heat pumps
- Small wind turbines
- Fuel cell systems
- Solar roofing tiles
- Solar panels for generating residential electricity
- Energy-efficient windows, doors, and skylights
- Energy-efficient heating and central air conditioning units
Tax incentives for energy-efficient systems and appliances typically work on a percentage basis, in which you’ll receive a credit for a portion of what the product costs you. View this guide from the IRS for information on claiming your residential energy-efficient property credit.
Home Renovations for Medical Purposes
Home improvements made for medical reasons are typically tax-deductible. If your medical improvement costs exceed 7.5% of your gross annual income, you’ll qualify for itemized deductions for those expenses. The improvements must be made to provide medical care for you, your partner, or a dependent to qualify for a tax break.
Improvements that qualify as medical expenses include:
- Entrance and exit ramps
- Widened entryways
- Handrails and support bars
- Lowered cabinets and appliances
- Relocated electrical outlets and fixtures
- Porch lifts and stairlifts
- Modified smoke detectors and warning alarms
Capital Improvements After You Sell
A capital improvement project increases your home’s value, extends its useful life, or modifies it for new uses. While you won’t get a tax break on the cost of the improvements, you can save money on taxes if you decide to sell your home.
Improvements you made to your home before selling it ultimately increase your cost basis – the amount you’ve invested in the property. At the same time, such improvements reduce your profit from a potential sale.
For example, if you bought your home for $400,000 and made $30,000 worth of improvements, you’re left with a $370,000 amount you’ll be taxed on. This number, called your tax basis, is your capital investment in the property.
When you sell your home, you’ll pay taxes on the profit you earn minus the amount of your capital improvements. So, if you sell your home for $600,000, you’ll pay taxes on $170,000 since that’s your profit after the sale and your home improvements.
The following items are examples of qualifying capital improvements:
- Decks
- Swimming pools
- Rooms
- New roof or full shingle replacement
- Landscaping features
- New central air conditioning or plumbing systems
Home Office Updates
The home office deduction gives self-employed homeowners a tax break on costs incurred to run a business from home. The IRS specifies that to qualify for this deduction, the homeowner must regularly and exclusively use part of their home as a primary place of business.
Qualifying taxpayers can use one of the following options to calculate their home office deduction:
- The taxpayer can assume a flat-rate deduction of $5 per square foot of office space with a maximum of 300 square feet or $1,500.
- The taxpayer can calculate the percentage of their home used for business to determine expenses incurred. Expenses include the costs of a mortgage, insurance, utilities, depreciation, and repairs.
This IRS page provides the forms needed to determine home office expense deductions.
Final Thoughts
Homeownership involves a lot of number crunching and countless expenses. Luckily, some of the projects that improve your living space may be eligible for tax benefits come filing time. With the information from this guide, you’ll be able to tackle tax season like a pro.
