February 23, 2024

Everyone would love to reduce their tax bill and pay less money to the IRS. But did you know that you can write off home improvements on your taxes? The good news is that certain home improvements can reduce your tax liability. For example, home upgrades that add value to your property, improve energy efficiency, or are adaptations for medical purposes are tax deductible. 

Of course, not all home repairs can lower your tax obligations. And there are certain limits on how much you can claim on your tax returns. But capital improvements to your home make you eligible for tax deductions or tax credits. 

As with most tax laws, the rules on writing off home improvements can be complicated. Therefore, this article aims to disentangle the complexities when writing off home improvements on your taxes. 

Before learning about home improvement tax deductions, there are a few things to watch out for. First, the rules can change from year to year. Therefore, you should speak with a tax advisor about how much you can write off on taxes. Additionally, your income level can also impact home improvement deductions.

But before submitting all your receipts from Home Depot to the IRS, it’s crucial to know what is considered home repairs — non-deductible expenses and home improvements — tax-deductible expense.

What is Considered a Home Repair?

Home repairs are part of regular upkeep and maintenance. Common home repairs include fixing plumbing leaks, patching drywall, replacing appliances, or repainting walls. Unfortunately, typical home repairs are considered ordinary expenses and ineligible for tax deductions. What’s the reason? They cannot increase your cost basis when you sell your home. 

Here is a list of common home repairs that do not affect your taxable income:

  • Fixing a broken gutter
  • Roof repairs or fixing broken shingles
  • Replacing a broken window
  • Replacing or repairing furniture
  • Repairing the HVAC system
  • Remodeling a bathroom
  • Replacing or restoring the damaged siding
  • Resealing a cracked driveway
  • Building a new patio

The only exception to the above list is if you have a home office where your run a business. However, strict limits exist on how much you can write off on taxes.

What is Considered a Home Improvement?

Home improvement expenses you can include on a tax return must be connected with capital improvement. They either improve the cost basis in your house, increase its value, improve energy efficiency, or make a home suitable for medical care. 

What home improvements are tax deductible? Here are five areas where improving or adapting your property can result in potential tax breaks for homeowners.

1. Energy-efficient home improvements

Energy-efficient improvements are a common tax deduction for homeowners. According to the IRS, you can deduct between 22% and 30% of the cost of installing approved equipment and devices that boost energy efficiency. 

Energy incentive home improvements can include the following upgrades:

  • Installing solar energy systems 
  • Geothermal heat pumps
  • Installing or improving insulation
  • Installing a new furnace
  • Biomass fuel stoves
  • Small wind turbines
  • Energy-efficient heating and air-conditioning systems

Some energy-efficient improvements like air-source heat pumps, water heaters, and circulating fans allow a tax credit of 10% up to a total cost of $500. 

2. Home improvements to increase the resale value

Any capital improvements that increase your home’s resale value can be included when you file your tax return. What home improvements are tax deductible in this case? Here are a few examples of capital improvement projects:

  • Making an attic or basement liveable
  • Increasing the number of bedrooms or bathrooms
  • Replacing the HVAC system with an energy-efficient system
  • Building an addition to the property
  • Installing a swimming pool
  • installing storm windows or doors

It’s good to know that deducting home improvements that increase the resale value only applies when you sell your home. The profit on the house is referred to as “tax basis.” You can then use the deductions to reduce your liability for capital gains tax.

3. Home improvements related to medical care

Deducting home improvements is possible when making adaptations for medical care. For example, installing special equipment, stairlifts, bathroom modifications, or allowing wheelchair access are all eligible tax deductions. In addition, the IRS says that these medical expenses can be for you, your spouse, or a dependent.

Other examples of acceptable medical deductions include the following: 

  • Lowering kitchen cabinets to make them more accessible
  • Medical equipment
  • Expanding doorways
  • Modifying smoke detectors and alarm systems
  • Modifying electrical outlets
  • Installing grab bars anywhere in the home
  • Installing air conditioning to improve the condition of respiratory illnesses

The tax regulations on the cost of improvements say that you can only deduct medical expenses when they exceed 7.5% of your adjusted gross income. There are also state thresholds for deducting medical expenses.

What happens if the home improvements for medical care add value to the home resale value? In that case, you can make a partial deduction when writing off home improvements in the tax years when the upgrades took place. 

4. Home improvements for a home office

You can write off home improvements on taxes related to your home office in your primary residence. To be eligible for a tax break, they must be part of your home, the “principal place of business.” This can be a portion of your home (like a converted bedroom) or a separate structure (like a converted garage).

How does the tax deduction work for home office improvements? The IRS allows you to deduct the percentage of your home that comprises office space. For example, suppose your home is 2,550 sq. ft. and your office is 180 sq. ft. The home office deduction is 7.06% of the improvement costs in that case.

Unfortunately, if you are a W2 employee working from home, you cannot claim the home office upgrades as business deductions. 

5. Repairs if you rent part of your home

You can claim a tax deduction on rental property repairs but not home improvements. This also applies if you rent out a portion of your home. However, it is not easy to distinguish between home repairs and home improvements in a rental property or rented part of your home.

The only way to write off home improvements for a rental property is to depreciate expenses. This way, you can reclaim part of the improvement costs gradually. Therefore, you should speak with a tax consultant before filing returns with deductibles for rental property.

How to Depreciate Home Improvements

You can claim depreciation deductions if you use part of your home for business — home office or part of the property you rent out. Depreciation is a way to claim for wear and tear and significant improvements. The depreciation can include 100% of the improvement costs in these circumstances.

Suppose the home office improvements benefit the whole house. In that case, you depreciate the percentage of the property used for business purposes. Also, you can depreciate a rental expense against the rental income. As usual, with these tricky areas of tax returns, you should get advice from a tax professional.

Home Repairs vs. Home Improvements

The primary difference between home improvements and home repairs is that repairs generally keep the home in good condition, whereas improvements add to the market value. For example, a fresh coat of paint will not add monetary value to a home. However, building an addition will increase the sale value.

Are Home Repairs Tax Deductible?

Typically, you can only include home repairs as a tax deduction if they are for part of your home used to run a business. In that case, the cost of repairs is depreciated. Therefore, before making major repairs, research whether they could be classified as improvements. It’s also a good idea to save all payment records and documentation. 

Can you write off home improvements on your taxes? The answer is yes. Therefore, it’s vital to keep track of all capital improvement expenses.

However, not all deductions can be made in the same tax year. For example, home improvement costs related to improving energy efficiency or adapting the home for a medical condition can be filed in the same tax year. But permanent improvements that boost the resale value only yield tax benefits when you sell your home. 

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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