Are Home Improvements Tax Deductible?

If you’ve made renovations to your home or are planning to make upgrades, you might be wondering if any of those improvements are tax deductible. While capital improvements increase your home’s value, not all of them qualify for a tax deduction. 

Here’s what you need to know about which projects count as capital improvements, as well as which projects can have tax benefits.

What home improvements are considered capital improvements?

According to the IRS, capital improvements add to your home’s value, prolong its usefulness, or adapt it to new uses.

“Examples include replacing a roof, building a deck or patio, finishing a basement, adding a new bathroom, and making changes to improve a home’s energy efficiency,” says Thomas Brock, CPA, CFA, and expert contributor at Annuity.org.

Brock offered an easy way to tell whether your home project is a repair or a capital improvement: If it simply restores your home to its original condition, it’s a repair. Repairs only count as capital improvements if they’re part of an extensive remodeling or restoration project. 

How do capital improvements affect your home's cost basis?

As Crystal Stranger, CEO of Optic Tax Inc. explains, your home’s tax basis is the amount you’ve invested in the property. The larger your investment, the larger your cost basis. Capital improvements increase your home’s cost basis.

Stranger says that if you sell your home, the cost basis is the amount you deduct from the sale price to determine how much capital gains tax you owe. 

Each capital improvement you make increases that deduction and reduces the amount of capital gains on which you might be taxed.

Are energy-efficient upgrades tax deductible?

Energy-efficient upgrades aren’t deductible, but they can have tax benefits:

Tax credits

Unlike a deduction, which reduces your taxable income so that you’re taxed on less money, a tax credit reduces the amount of tax you owe. Each dollar of tax credit reduces your tax bill by $1. 

The IRS currently allows two energy-related tax credits. The first is the energy-efficient improvement credit. It covers certain improvements such as energy-efficient exterior door and window replacements, insulation, heating and air conditioning equipment, biomass stoves and boilers, and the cost of home energy audits.

The credit is worth 30% of the cost of eligible items, up to $1,200 per year for most products. However, some items have higher or lower limits. Check the Clean Energy Tax Credit page on the U.S. Department of Energy website before you start your project.

The second credit is the residential clean energy credit, which covers some of the cost of wind, geothermal, and solar power generation, as well as solar water heaters, fuel cells, and battery storage. The credit is worth 30% of the cost of these products.

Capital improvements

Capital improvements that upgrade your home’s energy efficiency increase your tax basis like other capital improvements do. As a result, they can reduce the capital gains tax you owe when you sell your home.

If you receive a tax credit or other government subsidy for your energy-related home improvement or renovation project, subtract the amount from your cost basis. You’ll increase the cost basis by the total cost of the eligible project, minus the amount of credits and/or subsidies you received.

Can medical necessity home improvements be deducted?

Medically necessary home improvements can be deducted in some cases.

One determining factor is whether it adds to the home’s value. If it does, it’s a capital improvement. In that case, you can deduct the costs that exceed the amount of value added.

For example, say you add an elevator to your home because a mobility impairment makes it impossible to use your stairs. If that elevator costs $40,000 but only increases your home’s value by $20,000, you can deduct up to $20,000 as a medical expense. If, on the other hand, the elevator increases your home’s value by $40,000 or more, the expense is not deductible. 

IRS Publication 502 lists several improvements that typically don’t add to your home’s value. It includes projects like constructing ramps, widening doorways and halls, and adding handrails or grab bars. The entire cost of these improvements is deductible as a medical expense.

That said, the IRS has rules about who can deduct medical expenses and the amount they can deduct.

“Medical expenses have to exceed 7.5% of gross income to be deductible, including medical home improvements,” Stranger said. 

“The medical home improvements would need to be quite substantial to provide a deduction now, so few taxpayers qualify in practice,” Stranger said.

How do home office improvements impact taxes?

A home office can impact taxes in a couple of ways. In addition to earning you a tax deduction in the year you make the improvements, you also might be able to use some of the improvement to increase your cost basis and decrease your capital gains tax.

Home office tax deduction

If you’re self-employed and your principal place of business is in an area of your home dedicated specifically to your work, you might be eligible to deduct improvements to that space.

You can take a simplified home office deduction of $5 per square foot, for up to 300 square feet of space. Alternatively, you can claim the actual expenses you incur for improvements to your home office exclusively. Or, you can claim a percentage of improvements that benefit your home overall. The percentage is equal to the percentage of your home’s square footage you’ve dedicated to office space. The IRS calls this the business percentage.

For example, if your home is 2,000 square feet, and your home office is 200 square feet, your home office is 10% of your home. If you were to replace your roof, you could deduct 10% of the cost as a home office deduction. But if you have only your home office painted, or you replace windows just in that room, you can deduct 100% of the cost.

Depreciation

If you take a home office deduction, including for improvements, you’ll have to depreciate the business basis — the portion of your home’s basis that applies to your home office. Depreciation reduces your basis, resulting in higher capital gains tax when you sell, and that’s not the only potential consequence.

“If you have a home office and own your property, a portion of the gain when you sell your home will be taxable, based on the business use,” Stranger said. “This is true whether you depreciate the improvements or not, and the amounts for depreciation will reduce your cost basis whether you deduct them or not.”

So, while a home office deduction can reduce your taxes in the year you claim it, it can result in a higher tax if you sell. 

Are repairs and maintenance expenses tax deductible?

The repairs and maintenance you do on your residence are not tax deductible unless they’re part of an extensive remodeling or renovation project. If you rent out part of your home or use your home for business, you can deduct the repairs and maintenance for only the rental or business portion. You can also deduct the repairs and maintenance on rental properties you own.