Are Home Improvements Tax Deductible? Find Out
Every homeowner is excited about getting a new deck, upgrading the old kitchen, or getting solar panels to save on electricity. When tax time comes, you may want to find out which of those home improvements are tax deductible. The following article will help you determine what you can and cannot claim on this year’s taxes.
- Capital improvements are changes to the property that improve its market value and are not tax deductible.
- Efficiency upgrades like solar panels, medically necessary renovations, and home office improvements are the exception to this rule and can be used as tax deductions when reasonable and necessary.
- Rental property maintenance costs are tax deductible.
- Capital investments may lower your tax bill when you sell your property.
- Documenting all home improvements and keeping receipts organized is important, and accounting software can help.
Table of Contents
- Capital Improvements & Requirements
- Home Improvements vs. Home Repairs
- 4 Home Improvement Tax Deductions or Credits
- How to Claim a Home Improvements Tax Deduction
- FreshBooks Eases Tax Preparation
- Frequently Asked Questions
Capital Improvements & Requirements
A capital improvement is any change to the property you own that adds to the value of the property, prolongs the property’s life, or adapts the home to new uses. It will usually involve a structural change or a restoration that improves the market value.
This includes home improvement projects like building a deck or garage onto the property, replacing the roof and installing solar panels, adding new built-in appliances, or renovating the bathroom.
If you made the improvements to your primary residence, some of the expenses will not qualify for a home improvement tax deduction but some might. Even if some of the expenses don’t qualify, you might receive a tax credit or be able to lower your tax bill when you sell your house. For example, if you and your spouse bought your primary home in 2019 for $200,000, made home improvements in 2021 for $50,000, and then sold the home for $500,000 in 2023, you may not have to pay any capital gains taxes on the sale. It is important to document all work completed on your home and keep receipts organized, so your tax professional can help you determine if the home improvement expenses can be added to the home basis ($200,000) and make the tax bill go away.
If the house is an investment property, the home improvements can also increase the taxable basis of the house. In some cases, you might be able to expense the improvements over a couple of years.
Some of the deductible home improvement expenses are often in the medical expense category. For example, installing a wheelchair ramp is partially deductible on your tax return only if you itemize your deductions.
Home Improvements vs. Home Repairs
A home improvement often increases the property value and is not done out of necessity. Home repairs, on the other hand, like painting the exterior, necessary roof repairs, patching up a hole in the wall, or replacing a broken window, are needed to keep the dwelling livable but don’t improve the property.
We know that most home improvements are not tax deductible or they can lower your tax bill when you sell the home. What about home repairs? If you make routine maintenance and repairs to rental property, you can deduct them as expenses, because they are ordinary and necessary to run your rental business. However, if the repairs were made to your primary home, they are not usually tax deductible. Fortunately, there are a few exceptions to the rule and 4 of them are listed below.
4 Home Improvement Tax Deductions or Credits
The following are 4 deductions or credits you can use to reduce your payment at the end of the tax year when done on a qualified property.
1. Energy-Efficient Home Improvements
The Internal Revenue Service (IRS) will allow you to take a federal tax credit of up to $3,200 if you have made any qualified energy-efficient improvements related to energy efficiency in your home. This credit can be claimed for improvements that are made to an existing home (not a new home) through the year 2032.
Qualified improvements may include adding insulation, solar energy systems, small wind turbines, and geothermal equipment into your principal residence, saving you up to $500 on new doors, new windows, and home energy audits. You can save up to $2,000 per year when you purchase a qualified biomass stove and boiler.
2. Home Improvements For Medical Care
If you require a primary residence remodel for medical purposes that helps “alleviate or prevent a physical or mental disability or illness,” you may be able to deduct the costs on your tax return. This could include medical expenses like installing a ramp to the front door, widening hallways for wheelchair access, adding handrails on the stairs, or installing a medical lift in the bathroom.
Any home improvements that help provide medical care for you or anyone living in your home can likely be used as tax-deductible home improvements. Those improvements can be partially deducted as part of your itemized deductions on your tax return.
3. Home Office Improvements
If you have a portion of your home that is a home office space used solely for work purposes, you may be able to deduct the costs of improving and maintaining your home office, if it is your principal place of business.
This could include security system installation and maintenance, installing a second telephone line, walling in a workspace, soundproofing, and other alterations to the home that affect and improve the home office.
4. Rental Property Maintenance Deductions
If you are the owner of rental properties, you can deduct appropriate, necessary expenses including the cost of maintenance and some supplies, materials, and repairs that keep the entire home in good operating condition. It means that if your renter calls about a broken garbage disposal and you have to replace it, the cost will be tax deductible.
To be able to claim property maintenance materials and costs associated with repairs, it is essential that you keep documentary evidence like receipts and contractor bills. This will make it easier to back up your claims when you do your taxes.
If you are looking for help preparing your taxes this year, consider FreshBooks. The following video explains how FreshBooks makes tax preparation easier.
How to Claim a Home Improvements Tax Deduction
Once you have determined what home improvements are tax deductible, you can write them off by itemizing your deductions. Claiming a standard deduction will not work in this case.
Itemizing gives you the chance to detail all of your qualified expenses, listing the exact amounts spent on medical home improvements. You would claim the energy-efficiency credits on Form 5695. Alterations to improve your home office setup would be claimed on Schedule C, and any maintenance you’ve done on your rental property would be claimed on Schedule E.
Itemization is done on Schedule A of Form 1040 and could save you a lot of money on your upcoming tax bill if your expenses are eligible as a tax benefit.
FreshBooks Eases Tax Preparation
Keeping all of your receipts, canceled checks, and bills in one place in case of an audit, especially when claiming additional rental home repair and upgrade costs, is essential. FreshBooks accounting software makes it easy to track and categorize your expenses, so you can capture and document every eligible deduction.
With its simple interface and user-friendly programming, FreshBooks helps homeowners and small business owners maximize their tax deductions simply, saving you time, and saving you money on your upcoming tax bill. Try FreshBooks free today.
To learn more about the deductions you can take advantage of and how to make the most of them, we suggest reading our informative article on small business tax deductions.
FAQs About Home Improvements Tax Deductible
Tax time can feel overwhelming, especially for small business owners and homeowners. The following are some answers to frequently asked questions about home improvement tax deductions that may help you make better sense of your taxes.
Can you write off all home improvements?
No, most home improvements cannot be written off. Some exceptions to this rule include improvements to your home office, repairs to a rental property you own, medically necessary home improvements, and improvements that make your home more energy efficient.
Can you write off new windows on your taxes?
Yes, you may be able to write off up to $600 per year for new, more efficient windows that are installed in your primary home as one of your tax credits. You can also write off other qualified energy-efficient improvements like new doors, solar energy systems, and other additions that make your home more energy-efficient. FreshBooks makes it easier to keep track of your receipts and billing paperwork over the year, so you don’t miss out on important tax savings.
Is finishing a basement tax-deductible?
No, you cannot deduct the costs of finishing your basement on your taxes, unless you can prove that you need to make that space your new primary workspace, or can prove that what you are building is medically necessary.
Adding value to your home is considered a permanent improvement, which adds value to the home, and is not eligible for a tax deduction, but can be used to lower your capital gains taxes when you sell the house.
Is a new furnace tax-deductible?
Yes, if you are purchasing a new furnace that meets the requirements to qualify, you may be eligible for up to a $ 2,000 credit. It has to meet the Consortium for Energy Efficiency (CEE) highest efficiency tier, and you must keep all receipts related to the purchase and installation.
How do I prove home improvements without receipts?
Without receipts, you may be able to combine your bank or credit card statements with other paperwork from contractors or permits filed with the city, but there is no guarantee that this will be accepted by the IRS.
The best way to ensure you receive your maximum credits at tax time is to stay organized. FreshBooks expenses and receipt tracker can help. Simply upload photos of your receipts immediately to the site, organize them by project or date, and they will be available to you when tax time comes around.
What home improvements are not tax-deductible?
Most home improvements are not tax-deductible. You will not receive a home renovation tax deduction for any home improvements that increase the value of the home, except in the case of a necessary home office improvement, medically necessary renovations, or efficient energy upgrades.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .