Tax Deductible Home Improvements: What You Need to KnowApril 3, 2019 // Posted in:
Last Updated on December 8, 2021
Photo Credit: https://www.hgtv.com/design/real-estate/remodel-your-way-to-tax-deductions
With tax season upon us, some homeowners are feeling the pinch as they scramble to find deductions to lower their tax burden. Did you know there are some home improvements that can yield a tax deduction on capital gains? While some improvements might be considered repairs, others are considered allowable renovations that may help your bottom line. Here’s what you need to know:
How long have you lived in your home?
Before you get excited about taking advantage of the tax deduction, you need to know the facts. To be eligible for a tax deduction when you sell your home, you must have lived there for two of the last five years. Let’s say you’ve lived in your home for that long. You are eligible for up to $500,000 of your profit tax-free ($250,000 if you’re single or married, filing separately.) So, what does that mean? Simply stated, the remodeling cost can be deducted from your capital gains, providing the renovation was an eligible capital improvement.
What is a capital improvement?
Learning the IRS lingo is the first order of business to ensure you’re spending your money in the right places. A capital improvement increases your home’s value while a repair returns something to its original condition. Here’s what you need to know. A capital improvement must:
- Last more than one year
- Add value to your home
- Prolong your home’s life or adapt it to new uses
It’s easy to confuse capital improvements with repairs. Here are some examples of how they’re different:
Repair (Non-Eligible) Capital Improvement (Eligible)
Replacing a few roof shingles Replace entire roof
Replace a broken window pane Replace the window
Home improvements- like painting your house or replacing worn out gutters- might spruce up the look of your home, but they are not considered deductible home improvement expenses. Here are some examples that are:
We’ve broken it all down with some popular examples of how homeowners are improving their homes as they enjoy the tax benefit of their renovation. Here are some home additions that qualify as capital improvements, according to the IRS Publication 523:
Heating and Air Conditioning Systems
- Installation of a new heating system
- Installation of a new central air-conditioning system
- Water filtration system
- Central humidifier
Miscellaneous Interior Improvements
- New plumbing systems
- Air filtration systems
- New insulation, including pipes and ducts
- Home security
- Intercom system
- New water heater
- Installation of new septic tank
- Attaching soft water system
- Landscaping for curb appeal
- New driveway and/or walkway
- Fence or retaining wall
- Swimming pool
Major Remodeling and Repair Projects
- Remodeling a kitchen
- Adding a new bedroom
- Adding a new bathroom
- Adding a garage or porch
- Installing a satellite dish
- Extensive repairs due to a fire, flood or other serious incidents are also deductible.
- New siding
- Major flooring improvements
- Storm windows
Medically Necessary Upgrades
If you have to add a medically necessary upgrade to your home, that work falls under an entirely different category. The projects are deductible but technically fall under medical expenses. A few examples of work that may qualify for a medical expense deduction are:
- Installation of bathroom handrails
- Widening doors and hallways
Energy Efficient Upgrades
There are two categories of energy-efficient upgrades you can make to your home. You can tap into one (or both) credits depending on your needs and the goals you have for your home.
Energy Tax Credit (for homes not used as businesses)
This tax credit is for standard energy-efficient upgrades. A few things to note are that there is an upper credit limit, and the items need to be approved by the Department of Energy in order to qualify. For this credit, taxpayers are eligible for a 10 percent nonbusiness energy property credit for the cost of:
- Installing home insulation
- Replacing exterior doors
- Replacing a furnace
Renewable Energy Tax Credit
The second tax credit program revolves solely around renewable energy. This program runs from 2019-2023 and is a step-down program. What a step-down tax credit program means is the amount you are eligible for gets reduced every year.
Here, taxpayers are eligible for a big one-time tax credit for energy-efficient upgrades to their home. They can write off a percentage of the cost for labor and installation of any solar, geothermal, wind or fuel cell technology. (Note: Fuel cell only applies to a primary home.)
There is no upper limit for solar and wind, but there is a limit on fuel cell technology. That limit is based on kwh usage, so you will want to make sure you know what those limits are before you dive into an upgrade.
Home Business or Rental Property Loophole
Home-based businesses are gaining popularity and don’t fall under the same guidelines for capital improvements. If you’re a businessperson working from home, or own a rental property, then you need to know that all repairs, improvements and additions to that property are tax deductible. The catch: You must declare the expense as depreciation to cover the cost.
There is a catch: You must declare the expense of any major upgrade, or larger renovation project, as depreciation to cover the cost. This effectively spreads the cost out over the course of many years.
One added bonus: If you install a new air conditioner or water tank to your home, you can depreciate 15 percent of the cost, providing you’re using 15 percent of your home for office space.
One Last Tip: Document all Expenses
Remember, you can only deduct expenses that you can prove so be sure to save all your records and receipts for at least three years – even after you’ve sold your home. If you’re in doubt, find out. For guidance specific to your situation, contact your tax advisor or visit the IRS website.
Are you considering a kitchen or bath renovation in your home? It could save you money in the long run. Contact Granite and Trend Transformations for a free in-home design consultation. With most jobs completed in as little as one day, you could be on your way to a beautiful new space in no time.