Most home improvements and repairs are not tax-deductible. There could be some benefits if you plan your home improvements ahead and know the Do’s and Don’ts of filing taxes. Broken down below is some of the home improvement tax benefits you could take advantage of. Also commonly asked questions when it comes to home improvements and taxes are answered.
A quick primer: The IRS categorizes tax deductions as either an improvement or a repair. A home improvement — like building a deck or adding central air — is something that adds value to your home. A repair is something that keeps your home in good operating order — like fixing a leaky faucet or replacing a broken window. Unless your repair adds value to your home, most repairs cannot be deducted on your taxes.
Which Home Improvements are Tax-Deductible?
While most home improvements are not tax-deductible, they could lead to tax benefits when you go to sell your home. If you plan well, you could qualify for some of the benefits listed below.
Tax-deductions for home improvements could include:
- Home office improvements
- Rental property improvements
- Loan interest deductions (If you pay for the improvements through a mortgage or home equity loan)
- Qualifying medical expenses
Other Tax Benefits:
- Through a limited-time tax credit, you could claim the cost from installing energy-efficient technology on your property.
- If your improvements add value to your home, you could potentially earn non-taxable capital gains when you go to sell your home.
Home Office Tax Deductions
You could get a small deduction on the improvements you make on your home if you use a room in your home as an office. Additionally, any repairs that benefit your entire home may also be deducted based on the percentage of your home that’s used as an office. For example, if you add central air to your home and your office makes up 10% of your home, you could deduct 10% of the cost.
Home Renters Improvement Tax Deduction
If you rent out a part of your home, you may be able to deduct in full any improvements you make to that space. For example, if you decide to add a bathroom to the rental space, you likely can write off 100% of that expense.
Use Your Mortgage to Pay for Home Improvements
The way you pay for home improvements, could be the way to save on your taxes. If you’re planning on making improvements on a home you bought this year, you may be able to roll the expense into your mortgage. While the expense will accrue interest through your mortgage, the amount you pay in interest may qualify for a deduction on your taxes.
Get Tax Benefits from Home Improvements for Qualifying Medical Expenses
If your doctor suggests home modifications to provide care for you or a family member, you may be able to write-off the expense. Qualifying medical expenses could include a wheelchair ramp, modified doorways, even adjustments to outlets and fixtures. However, if the medical home improvement adds value to your home, it will not be tax-deductible.
Other Types of Home Improvements That Could Save You Money on Your Taxes
The IRS has a lot of requirements for home improvement deductions, but there are two other ways homeowners could save when filing taxes.
Save Money by Upgrading Energy Systems
The Residential Renewable Energy Tax Credit is a limited time credit that’s available when you install energy-efficient equipment on your home’s property. You could claim any of the following:
- Solar hot water heaters
- Solar electric equipment (like solar panels)
- Geothermal heat pumps
- Small wind turbines
- Fuel cell properties that use renewable fuels
This federal tax credit is only available through 2021, but you may be able to claim up to 26% from the cost of purchasing and installing the energy-efficient technology.
Sell Your Home and Make a Profit with Untaxed Capital Gains
Home improvements that add value to your home may give you a tax break when you sell it. If your home sells for more than what you paid, the profit you make may be considered a non-taxable capital gain. Just be sure to keep good records of how much you paid for your home and spent on renovations (As in, hold onto every invoice and receipt!).
Home Improvement & Repair: Tax Write-Off FAQs
If maneuvered well, home improvement tax benefits can yield an advantage. Here are some answers to frequently asked questions about home repairs, improvements and taxes.
Are Home Foundation or Roof Repairs Tax-Deductible?
Fixing the foundation or replacing roof shingles on your home are not tax-deductible. That’s because most repairs don’t add value to your home. However, if the repair does add value to your property (like a roof replacement), it could be considered a home improvement. In that case, you may be able to get a tax break in the year that you sell your home.
Are Home Improvement Loans Tax Deductible?
Maybe! You might be able to fully deduct interest paid on a loan that’s used to improve your home if you meet certain IRS requirements. Learn more about how home improvement loans work.
Can You Write off Repairs on a Second Home?
Unless your second home is used as a rental property or business office, you likely cannot write off repairs on a second home.
Are Rental Home Repairs Tax Deductible?
Yes – if you receive rental income for a property you own, you can deduct the cost of repairs from your taxes.
The Most Important ‘Do’ of Home Improvement Tax Do’s and Don’t’s
When you’re planning your home improvements, there is a lot to think about. But if you’re strategic about what home improvements you make and why, you may be able to take advantage of some tax benefits.
The most important habit to make when you’re planning home improvements or filing taxes is to keep track of all of your expenses. When you have a clear record of everything you’ve done on your home, you can be sure you’re taking advantage of every tax benefit you qualify for.
Please note this article is not intended to provide tax advice. We encourage everyone to consult a tax professional for all of their tax questions. For more information on tax implications and homeownership, visit IRS.gov.
Source: Best Egg
As usual, should you be interested in buying or selling a home, or for any further information regarding your home, please contact me, Karen Borden, your North Alabama Real Estate Professional!
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