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Owning a home is likely the biggest investment of your life. You may be wondering how much of your home improvements are tax deductible. The short answer is: Many home improvement projects don’t qualify for tax deductions. But some might qualify for a tax break or have other tax implications down the line when you sell your home. Continue reading, as we will dive into the ins and outs of these rules of what is, and isn’t, a write-off.
Keeping your home modern and appealing can take a lot of money. And while you can’t deduct the cost of improving your home the year you spend the money, you can keep track of all these costs and include them as part of the “basis” (your cost plus any improvements) in your home for when you sell the house. Always make sure to keep all the receipts and dates of service.
What are home improvement tax deductions?
As mentioned above, most home improvements aren’t immediately tax deductible for the average homeowner. However, here are a few situations in which you may be able to write off what you pay to improve your home.
- Energy-efficient improvements: The federal government offers tax credits for specific energy-efficient home improvements. We go into more detail on that below.
- Renewable energy systems: There are also tax credits available for the installation of renewable energy systems, like solar panels, solar water heaters, wind turbines, and geothermal heat pumps.
- Home office deduction: If you use part of your home exclusively for your business, you may be able to deduct a portion of your expenses, including mortgage interest, insurance, utilities, and depreciation. Certain improvements to the home office space may also be deductible. We explore this in another section of the article.
- Medical improvements: If you make home improvements for medical reasons and to accommodate a disabled family member, such as adding ramps, widening doorways, or adding a ramp, you may be able to deduct these costs as a medical expense. More on this below.
- Capital improvements: Improvements that add value to your home or prolong its useful life can reduce the amount of capital gains tax you owe when you sell your home, but won’t be immediately deductible. We go into more detail on this below.
- Landlord home improvements: If you’re making improvements to your home to increase or maintain its rentability, there are write-offs. More on that below.
Home repairs vs. capital improvements
Capital improvements are permanent upgrades, adaptations, or enhancements that improve the property and increase your home’s value. To qualify as a capital improvement, the IRS states that the property must meet the following conditions:
- The improvement “substantially adds” value to your home.
- The improvement prolongs the useful life of the property.
- The improvement is permanent.
According to the IRS, capital improvements aren't taxed directly but can affect the taxes you pay when you sell the property. This is why keeping receipts and documentation is so important for homeowners. Make sure you have paper and electronic copies.
The average homeowner generally can’t claim home repairs as tax deductible. However, businesses, sole proprietors, and rental property owners can deduct expenses for repairs and maintenance of their property and equipment, although the average homeowner can't generally claim a tax deduction for these expenses. Always work with your Tax Pro if you have questions before spending a lot of money home repairs.
Qualifying home improvement expenses
Improvements include any asset or item that extends the life of your home or upgrades the home. They can include:
- A new roof
- New hot-water heater
- New furnace and air conditioning system
- New windows
- Upgraded kitchen
- Upgraded bathrooms
- Wood or tile flooring
Medically necessary home improvements may be deducted as medical expenses. We will go into what and how of this toward the end of the article.
How do home improvements impact your taxes when you sell the house?
Let’s say you’ve made vast improvements to your house, but you decided you’d like to move. It’s likely you’re wondering how all these upgrades will affect you when selling your house.
Under current law, if you have owned and lived in the home for at least two of the five years leading up to the sale,
- The first $250,000 of profit on the sale of a principal residence is tax free for single filers.
- The first $500,000 of profit is tax free for married couples who file joint returns.
Below is how you can calculate the size of your profit when you sell:
- Tally up the total of everything you paid for the house—the original purchase price, fees, etc.
- Add to that the cost of all the improvements you have made over the years to get a grand total, which is known as the "adjusted cost basis."
- Compare the adjusted cost basis with the sale price you get for the house.
If you've made a profit, that gain may mean you take a tax hit (generally, only if the profit is more than $250,000 for an individual, or $500,000 for a married couple filing jointly). Again, work with your Tax Pro.
Some other notes on how selling a home may affect your taxes:
- Unfortunately, losses on sales of personal residences are not deductible, so this is something to consider before listing your home.
- If you sold a home prior to August 5, 1997, and took advantage of the old rule that let home sellers put off the tax on their profit by rolling the profit into your new home, your adjusted basis is reduced by the amount of any rolled-over profit.
Every situation is different, so work with your Tax Pro on what improvements you may have made to your home and what implications selling your home may have.
Home improvement tax credits vs. tax deductions
Some home improvement projects may qualify for a tax deduction, while others may qualify for a tax credit. A tax deduction decreases the amount of your income before calculating how much you owe in federal taxes. On the other hand, a tax credit can decrease the amount in taxes you owe or boost the amount of your tax refund. We delve into some of these below.
Energy-efficient home improvement credit
If you make or made qualified energy-efficient improvements to your home after January 1, 2023, you may qualify for a tax credit up to $3,200. You can claim the credit for improvements made through 2032.
Starting on January 1, 2023, this credit covers 30% of certain qualified expenses, including:
- Qualified energy efficiency improvements installed during the year
- Residential energy property expenses
- Home energy audits
There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenses.
The maximum credit you can claim each year is:
- $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
- $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers
It’s good to note that the credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033.
The credit is nonrefundable, so you can't get back more on the credit than you owe in taxes. You can't apply any excess credit to future tax years.
Home office tax deduction
The first question you’d have to answer would be: Is your home-based office a place of business? A home office will qualify as the principal place of business if you use it exclusively and regularly to meet with clients, or to conduct the administrative or management activities of your trade or business.
There must be no other fixed location of the business where you can conduct these activities. Home office deductions cannot be more than your earned income. If they are higher, you may carry the non-deductible expenses over to the following year. Form 8829, Expenses for Business Use of Your Home, is used to claim a deduction for home office expenses for a self-employed person.
It’s important to note that the Tax Cuts and Jobs Act (TCJA) suspended the ability to deduct home office expenses for an employee the period beginning January 1, 2018, and ending December 31, 2025.
Do I qualify for home office tax deductions?
You may be entitled to a tax break if you are running a business from your home. The following questions will help you figure out whether you can deduct expenses incurred in connection with the business use of your home:
- Is this part of your home used regularly and exclusively in conjunction with your business or work?
- Is this your primary place of business?
- Is this where customers and clients meet with you?
- Is this where you store product samples?
- Is this where you administer or manage your trade or business?
If you answered yes to any of these questions, you may be able to deduct certain depreciation and operating expenses for the business use of your home. The same might apply if you use a separate structure (such as a shed), store business-related supplies, or inventory in an area of your home.
Deducting medical home improvements
Home improvements can be deductible as a medical expense if their purpose is medical care for you, your spouse, or your dependents. These expenses are fully deductible subject to the limits discussed below if they don't increase the value of your home.
Examples of such fully deductible expenses are improvements to make your home wheelchair accessible for a disabled family member, or to make it easier for a disabled person to get around the home, including:
- Building entrance or exit ramps for your home;
- Lengthening doorways at entrances or exits to your home;
- Widening or otherwise changing hallways and interior doorways;
- Putting in railings, support bars, or other modifications to bathrooms;
- Changing fire alarms, smoke detectors, and other warning systems for impaired family members;
- Lowering or changing kitchen cabinets and equipment to allow for a wheelchair bound person to navigate;
- Moving or modifying electrical outlets and fixtures;
- Installing porch lifts and other forms of lifts;
- Modifying stairways; and
- Adding handrails or grab bars anywhere in the home.
Home improvements can run the gamut. And not every home improvement counts in the same way. You may have more questions and our Tax Pros are always here to help. Find one near you today.
Frequently asked questions
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.