Are Home Improvements Tax Deductible?

Putting in the time and money to renovate your home is a fantastic way to boost its value, but are those projects considered tax-deductible? Unfortunately, they’re probably not. Home improvements on a personal residence are generally not eligible for tax breaks when you go to file. There are, however, a few exceptions for certain home improvement projects. Read on to get a better understanding of what those are and how to get the most out of your investments!

Energy Efficient Property Installations

Certain energy efficient equipment installations, such as solar panels, solar water heaters, geothermal heat pumps, fuel cell equipment or small wind turbines may be considered eligible for a tax credit on your upcoming tax return.

This dollar-for-dollar reduction of your tax bill, called the Renewable Energy Tax Credit, was introduced as an effort to incentivize homeowners to make their homes more energy-efficient. The IRS states that “energy saving improvements” made to a personal dwelling before January 1, 2020 qualify for the credit, which is equal to 30% of the cost of the equipment installed.

Fuel cell equipment, however, is subject to restrictions. The maximum credit that can be claimed for fuel cell property is $500 per half kilowatt of power capacity and must be installed at your primary residence. Vacation homes do not qualify.

Renovations Made for Medical Purposes

The IRS allows tax deductions on medical expenses related to “the diagnosis, cure, mitigation, treatment, or prevention of disease.” Don’t get too excited, though. The medical expenses must exceed 7.5% of your adjusted gross income before you can claim your deduction, and only out-of-pocket expenses qualify.

Making your home more wheelchair accessible by installing ramps, putting up handrails or widening doorways are all out-of-pocket projects that qualify for a full deduction. The catch? You’re only eligible for a full reduction so long as the additions do not increase your property value. That doesn’t necessarily mean that you can’t receive a tax break if they do though. In these instances, you can file for a partial deduction to get a portion of your return back.

Tax Savings When You Sell

Although the most common home improvements like revamping a kitchen or renovating a bathroom don’t offer the instant gratification of tax breaks, they do offer a significant return of investment when you sell your home.

A homeowner who makes a profit selling their home can exclude up to $250,000 of that profit from their taxes, and for married couples who file jointly, up to $500,000. You can calculate this using either your basis (the price you paid for it and how much you spent on improvement projects while it was under your ownership) or your total financial investment in the property at the time of the sale. It’s important to note though, that not all changes that you make to your house can be added to your basis. In order to clarify, we need to distinguish between what is considered a repair versus an improvement.

Capital Improvements

Capital improvements are things that add value to your home, prolong its life or allow it to adapt to new uses. These include larger projects like an addition to the house, putting in a swimming pool or a roof replacement. Capital improvements also include smaller projects like adding an extra water heater or installing a home security system.

Home Repairs

Anything from fixing a gutter to replacing a window pane can be considered a repair. While it’s a necessity, it doesn’t in fact add to the original value of your home. Sure, if you neglect your home of important repairs it will affect how much you can sell it for, but the money spent has to actually provide equity in order for it to be included in your basis. 

From fixing repairs to tackling entire gut jobs, we’ve got all the tips, tricks and materials you need to help you uncover your home’s true worth. Contact our professional team to get started on your next project!

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Doug Ashy

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