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By Bretton Keenan
If you recently remodeled your home, you may be wondering if the expenses can be deducted from your taxes. The first thing you need to ask yourself is: what’s considered a tax-deductible home improvement?
Adding a new item to your home or upgrading an existing item is usually considered a capital improvement and can be deducted from your taxes.
According to the IRS, a capital improvement is any upgrade that substantially adds value to your house, prolongs the life of your home or adapts it to new uses. For example, adding a room or second story to your house would bring significant value to your home. Or new plumbing and wiring can help prolong the life of your home, while updating and modernizing your kitchen might help you adapt it to new uses.
If you want to include a home renovation or maintenance project in your tax write-off, it has to be seen at the time of sale. So, if you put in a chain-link fence 10 years ago but replaced it with a wood fence five years ago, the money you spent on the chain-link fence would not be included in your deduction when you sell the home.
Some home improvements can be deducted during the following tax season, but some won’t see the tax benefit until you sell your home. We talked to Stephen Fishman, attorney and legal writer for Nolo, Ginita Wall, a Certified Public Accountant and Financial Expert with TurboTax, and Laura Agadoni, author of New Home Journal, to get some tips on home projects that can earn a tax write-off. Let’s jump into some of the leading examples of home improvements that will provide you some financial relief.
Did you landscape your front yard or renovate your rental property in the last year? We’ve gathered a few examples to help you determine what kind of home improvements are tax deductible.
Energy-Efficient Improvements | Medical Care Updates | Home Office Updates | Rental Property Renovations | Improvements for Resale Value
If your home is running on natural energy, you’ve earned yourself a tax credit. One of the more obvious examples is adding solar panels to your roof to generate electricity.
Here are a few other sustainable upgrades that provide tax deductions:
Depending on when you install these energy-efficient improvements, you’ll receive a different percentage of the cost. Here’s how Wall says the tax credit breaks down:
In some areas, installing double- or triple-paned energy-efficient windows to trap cool air or heat inside may also qualify for a tax credit.
Medically-necessary improvements with the main purpose of providing care for whoever needs them are other eligible expanses to take away from your taxes. For example, aging in place modifications can be deducted in full with a doctor’s note and include the installation of medical equipment.
Examples of medical care home improvements include:
Deduction amounts for these improvements must be reasonable and can’t include expenses made for aesthetic upgrades made in the process. According to Fishman, you can deduct 7.5% of your adjusted gross income for medical expenses. The money you spend to operate and maintain these additions can also be deducted. For example, you can deduct the cost of electricity to operate an elevator, but only if the elevator is used for medical purposes.
Do you work from home? If you’re an employee who simply maintains a working space at your residence, sorry, but you can’t deduct any investments made on your home office. However, if you use part of your house exclusively and regularly to operate a business, your home office renovations are tax-deductible. You just need to provide documentation that you have a legitimate business to qualify.
“Whether you use part of your house, a single room or part of a room, as long as you use it regularly for your business, you can deduct 100% of the improvements. This includes anything from painting or adding new lighting to installing new windows or new flooring. Part of your rent or mortgage may even qualify as a tax-deductible expense.”
Stephen Fishman, Attorney and Legal Writer | Nolo
Some repairs and improvements made to other areas of your house may even be partially deductible, simply because you operate a business from your property and need to uphold its function to maintain success. If your office takes up 10% of your home, you can deduct 10% of the costs spent on your home. Home office-related expenses can be deducted within the year they are completed.
If you’re a landlord, additions or improvements made to a rental property may be tax-deductible. More good news: they don’t even need to be upgrades that add substantial value to the property, like most tax-deductible renovations.
Home Repairs are not usually tax-deductible, but the costs of repairs to a rental property are fully-deductible within the year they are completed, as long as they are necessary in order to maintain a livable space for tenants and cost a reasonable amount.
Do you rent your home out as a temporary vacation rental? Whether you rent out your entire home or a room, expenses can be deducted proportionate to the number of days per year and how much of your home you rent out.
“It’s important to understand the difference between repairs and improvements for tax purposes. For example, let’s say your rental property’s roof is leaking. If you pay to get the roof repaired, you can deduct the entire cost. But if you replace the roof, you deduct the cost over multiple years.”
Laura Agadoni | Landlord, Editor-in-Chief of Landlordology
See the list of project examples below provided by Agadoni.
Tax-Deductible Repairs and Improvements for Landlords |
|
| Deductible Repairs | Deductible Improvements |
| Repairing an air conditioner. | Adding central air. |
| Replacing a broken kitchen cabinet. | Renovating the entire kitchen. |
| Refinishing wood floors. | Replacing wood floors. |
| Fixing appliances. | Replacing appliances. |
| Replacing cracked tiles in the bathroom. | Retiling the whole bathroom floor. |
Pro-Tip: Adding or replacing existing items are both considered improvements, which you would deduct over time. Improvements, such as renovating a bathroom or kitchen, add value to your property for many years to come, so you can’t deduct the entire cost in one year.
If you made permanent improvements to your home that increased your resale value, these count as tax-deductible house improvements that can be added to your tax-cost basis and help you avoid taxes when you sell your house. However, these expenses are not deductible within the year they are spent. This includes big projects like adding a swimming pool and smaller upgrades like installing a home security system.
Some other examples to increase resale value include:
If accepted in your area, payments made each year on a home improvement loan can also be fully deducted from your taxes.
There are a lot of different things you can do to upgrade your home. Here are some examples of projects you may have completed that can earn you a tax write-off.
A wet room provides a seamless transition from the bathroom floor to the shower floor. Essentially, they’re a continuation of one another separated by a door. Wet rooms are a popular addition to homes that need handicap modifications, because having the shower and bathroom floor on the same level eliminates obstacles for wheelchairs and prevents slips and falls.
As an added bonus, wet rooms are a popular home design trend. They provide a modern look and are a sensible addition for older people preparing their homes for aging in place.
Adding on to your home is a definite tax deduction at the time of sale because it increases the property’s resale value. Whether you finish your attic to add an extra room, add a walk-in closet or build an entire second story, you’re likely to see a return on investment.
Did you add insulation, turn your basement into a home office or convert it into an apartment you can rent out? Finishing your basement is not a cheap affair. It can cost about $25-$50 per square foot, which can add up quick. Look into getting the money you spent deducted from your taxes.
Figuring out your tax-cost basis will help you determine your profit when you sell your home. This is a great way to get tax benefits on any improvements you made that did not qualify for an immediate deduction and can reduce the amount of taxes you have to pay when you sell your home at a profit. The tax-cost basis is the amount of money you spent to buy or build your house, including closing costs, and the expenses to improve the home.
Tax-cost basis = what you paid for your house + money spent on home improvements
Subtract the tax-cost basis from your sale price to determine your profit.
Let’s say you bought your house for $400,000 and spent $50,000 on improvements. Your tax-cost basis, or the total amount of money you spent on the home, would equal $450,000. If you sold your house 25 years later for $900,000, you would gain $450,000.
Pro-Tip: Organize your home improvement receipts to prove you deserve a tax deduction. Keep them for as long as you own the property and up to three years after. Keep your home sale closing documents for the same amount of time.
Yes. Generally, any expenses that add something new to your home or upgrade an existing facet of the house can be deducted from your taxes.
Unfortunately, no, home repairs do not count towards tax deductions (unless you're a landlord working on a rental property). The IRS says repairs are fixes to keep your house in good condition but that do not substantially add value to your home. Examples include painting your house or fixing broken gutters.
However, there is an exception to the rule. Repairs made after a disaster, like a fire or a flood, that are necessary in order to restore your home to its condition before the damage will always count as tax-deductible home improvements.
Home Improvements vs. Home Repairs |
|
| Deductible Home Improvements | Non-Deductible Home Repairs |
| Replacing an old roof | Patching a few leaky shingles |
| Installing energy-efficient windows | Replacing a broken window pane |
| Upgrading from laminate floors to hardwood | Fixing broken floorboards |
If you’ve been inspired to plan some house upgrades, try taking them on yourself.
Rely on these resources and make sure to keep records of your work so you can deduct the expenses during the next tax season.
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