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Can you deduct the cost of home improvements on your taxes? The answer is a qualified no—under most circumstances, you can’t claim home improvement expenses as a tax deduction. However, there are several exceptions to this rule. Even if you can’t deduct home improvement costs from your tax bill this year, you may have a chance later when you sell your home.
Which Home Improvements Are Tax Deductible
Routine maintenance and repairs do not count as home improvement projects. For example, you cannot count the cost of replacing a doorknob as a capital improvement.
Big Rental Property Tax Deductions
Home improvements must be part of a larger project, such as putting in a swimming pool or replacing all your windows with energy-efficient double-paned glass.
Calculate the percentage of your home’s area that is taken up by your home office. Then multiply any expenses related to the entire home to figure out what you can claim. For example, if your home office takes up 10% of your home’s area and your utilities cost $100, you can claim a $10 – 10% of $100 – deduction on your taxes.
Painting your home is not tax deductible in most circumstances. However, if you have a home office, you may be able to write off a portion of the cost. Since paint falls under the category of routine maintenance and repairs, you cannot list it as a capital improvement.
Home improvements that serve a legitimate medical purpose qualify for tax deductions. For example, widening a doorway or building a wheelchair ramp would both qualify. You can only claim the medical expense deduction if it exceeds 7.5% of your annual gross income.
The Tax Implications Of A Cash Out Refinance On Rental Property
As part of a broader effort to encourage environmentally sustainable behavior, the federal government offers two non-refundable tax credits to homeowners.
Technically speaking, tax credits are not quite the same as tax deductions. A deduction lowers your income before tax. In contrast, a tax credit is applied directly to your taxes. If you owe $3,000 in taxes and your energy credits are $3,000 or more, then you pay $0 in taxes.
Cost basis refers to the amount of money used to purchase an asset, such as a home. For example, if you spent $350,000 on your home and resold it for $500,000, then your cost basis would be $350,000 and your profit would be $150,000.
If you spent $50,000 on home improvement expenses, you can add that to your cost basis. The home improvements do not have to be made in the same year that you sell your home. For that home sale, your cost basis becomes $400,000 after the improvements, and your profit is reduced to $100,000.
Federal Income Tax Credits And Incentives For Energy Efficiency
Currently, the IRS only taxes home sale gains over $250,000 for single filers and $500,000 for joint filers. Adding home improvements to your cost base will not make a difference to your bottom line.
However, if you bought your home for $350,000 and sold it for $800,000 as a single filer, claiming those home improvements would lower your taxable gain from $200,000 to $150,000.
Home improvements are not tax deductible in most circumstances. However, if you run a business outside your home or if you make environmentally sound or medically necessary home improvements, you can offset those expenses with a lower tax bill at the end of the year. Plus, it’s worth holding on to your home improvement receipts in case the profit on the sale of your home wanders into taxable territory.
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Important Things To Know About Tax Deductions
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But wait! There is no need to turn off the computer in disgust and just walk away. While the cost of regular, tidy improvements isn’t deductible on your return, there are some really smart ways to recoup some of your home costs by knowing the ins and outs of a tax return. From energy efficiency upgrades to improving the parts of your home you use as a home office, we may just be able to find a deduction for the work you’ve put into your place.
Home Purchase Tax Deductions
Let’s start by looking at a prime example of an “improvement” deduction right in the middle of another write-off: your mortgage.
Where do home improvement budgets come from? Well, often they are scraped together from savings – and possibly a loan or two. None of these are going to help you in the tax department. As we said, home improvements can’t be written off like, say, tax preparation fees or medical expenses (although we’ll see later how medical expenses can lead to home improvement deductions).
One way you can smartly deduct your home improvement budget is to roll it into your mortgage when you buy a home. This may not seem like the most genius plan; after all, you’re still paying for the cost of repairs, and getting a bigger mortgage to cover those repairs means you’ll pay more interest. But remember that if you itemize your deductions, you can write off the cost of your mortgage interest. Add the cost of improvements to your mortgage, and that write-off can add up.
Single and married people filing jointly can deduct home mortgage interest on the first $750,000 of debt, while married-but-separate filers can deduct interest on up to $375,000 each. Also note that you can deduct interest paid on a home loan if it was used to build or “substantially improve” a home [sources: IRS].
Home Improvement And Residential Energy Credit
While some of the tax benefits for energy efficiency improvements expired in 2013, there are some ways to reduce your energy footprint while getting some tax savings.
One of them is a tax credit for energy efficient systems in your home. It’s a one-time credit (meaning you can’t take it every year), but it allows you to deduct 30 percent of the cost of any solar, geothermal, wind, or fuel cell technology you add to your home (the fuel) depreciable cell technology only applies to a primary home), as long as it was running by the end of 2019. Even cooler is that the 30 percent applies to labor and installation as well as the product itself. After that, however, the credit gradually decreases, so that the improvements put into service in 2020 get 26 percent, and those in 2021 get 22 percent. [sources: Perez, TurboTax.]
You can also take a non-business energy property credit for things like installing home insulation, replacing exterior doors or replacing a furnace. The credit is 10 percent of the cost, with a maximum of $500 from 2006 to today. There are also many other caveats you can find in this TurboTax article.
So this one is a little hard to wrap your brain around, but stick with us: When you sell your home, you may be able to get tax relief from improvements you made before the sale. Now on the surface it looks like exactly what we told you was impossible: a home improvement tax break. But it’s a bit more encompassing than that.
Top 3 Home Improvement Tax Deductions
When you sell your home, the term “tax basis” refers to the profit you make. And the idea is that any improvements you make to the home while you own it reduce the gain, leaving you with less to be taxed on. Note that if the home is your primary residence and you have lived there for more than a year, you are only taxed on the gain you make from the sale of a home if your gain is more than $250,000 for a single person or $500,000 is. for a married couple filing jointly [source: IRS].
So, if John buys a house for $500,000 and makes $50,000 in improvements, his tax basis is now $450,000. If he sells the house for $900,000, he will pay tax on the gain of $350,000 – not $400,000. Keep in mind, he will still be able to deduct the $250,
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