Are Home Improvements Tax Deductible?
Home improvement costs add up. Because they are investments in your home, it can feel like there should be some way to recoup the cost. Is there any way to reduce the bite with a tax write-off?
The answer in most cases is “no,” but there are some situations that allow you to get some money back in the form of a tax deduction.
We talked to tax pro Janie Rojas, a 14-year industry vet, about when a home improvement can be written off, and how to be sure you get back what you are due.
To help Acorn Finance borrowers get the most for their money, she helped us look into which sorts of improvements can cut your tax bill.
|
$1,000-50,000
Loan Amount
|
8.49-35.99%
APR
|
3–7 years
Terms
|
560
Minimum Credit Score
|
Disclaimer
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 8.49%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.
Capital improvements vs. home repairs
Home repairs are never deductible, but some home improvements are––and yes, in the eyes of the IRS, there is a big difference.
Home repairs are the things you do to keep your home in what they describe as ordinary and efficient operating condition. Think fixing leaky plumbing or replacing a broken stair.
Repairs to your home such as these are almost never deductible. Instead, they are considered routine expenses associated with owning a home.
Capital improvements, on the other hand, are permanent structural changes or restorations that meet three specific criteria. Home improvements that meet all three are tax deductible:
- They must enhance the property’s overall value.
- They prolong the home’s useful life.
- They adapt the home to new uses.
So, if you are pushing out a wall of your kitchen and adding an island and a double sink, you can claim these as capital improvements. Replacing the cabinet doors, on the other hand, probably won’t qualify.
These deductions can’t be taken all at once. Instead, you’ll be able to depreciate them over multiple tax years, with the current rules calling for 27.5 years. So, if you spend $80,000 on an expansion of your kitchen, you can cut your adjusted gross income by $2,909 each year. You can also often use these expenses to reduce capital gains when you sell (we’ll cover that in more depth later).
Which home improvements quality for a tax deduction?
Now that we’re on the same page about home repairs vs. home improvements, let’s look at the type of improvements that are tax deductible.
Important
Energy-efficient home improvements
“Doors, windows, roofs, insulation, energy-efficient heat pumps, things like that can be tax deductible,” Rojas says. She advises people to visit the IRS website’s home energy tax credits section when they are considering an improvement. She also cautions that, to qualify for the credit, the improvement must meet ENERGY STAR requirements.
“If you do doors, windows, skylights––they have to have certain ENERGY STAR certification requirements,” she says. She says homeowners can choose to buy a more expensive ENERGY STAR product because they’ll get the extra cost back when they file their taxes.
Medically-necessary home improvements
Improvements you need for health or medical reasons are another category you can deduct at tax time. The IRS allows you to write off home improvements that are medically necessary for you, a spouse, or a dependent living in the home.
You can take a deduction on medically necessary improvements such as:
- widening a hallway or an interior doorway
- adding ramps to the entryway of your home
- lowering your kitchen cabinets for accessibility
- adding grab bars or handrails anywhere in your home
- modifying your smoke detectors and fire alarms
You should consult with a tax pro to make sure you are staying within the rules, because there are a couple of complications:
First, for a home improvement expense to be fully deductible under the medically necessary rules, they can’t be improvements that increase the value of the home. Those sorts of improvements would be considered capital improvements and would be subject to the capital improvement rules.
Second, you can only take these deductions if you itemize your taxes. “To be able to itemize,” Rojas says, “the total has to be more than your standard deductions. And, a lot of times, these expenses aren’t.”
Tax deductions when you sell your home
Depreciation can take a long time. But, if you have made improvements on a home and its value has increased enough for capital gains to kick in, you may be able to recoup some of what you spent.
“Most home improvements are not immediately tax-deductible,” Rojas says. “But they can be added to the basis of a home.”
She goes on to give the example of a new kitchen. “Say you get a new kitchen and your home is worth $200,000. When you sell your home, you can add the cost of the new kitchen to the basis of your home so you make less of a [net] profit.”
Profits on the sale of your primary home are not taxed as long as they are under a certain amount. It’s only when you exceed the home sale exclusion limits that you owe taxes on the sale. As of 2024, the home sale exclusion limit is $250,000 for an individual and $500,000 for a couple. This number applies only to the profit. So, if you are single and you buy a house for $200,000 and sell it for $500,000, you owe capital gains on $50,000, the amount over the cap.
Your capital improvements, however, reduce your profit and thus the amount that is taxed. So, if you can document a kitchen addition or a second bathroom that increases the value of your home, you may be able to take a deduction.
Tax deductions for rental properties
A rental property is considered a business, so your tax deductions related to the property are handled differently. For instance, the IRS says you can deduct the cost of repairs because they are a necessary expense related to your business.
In other ways, rental property deductions are the same as those for a home you occupy. Home improvements are deductible through depreciation or through reducing capital gains if they meet capital improvement criteria.
Tax credits for historic homes
You are also able to get a tax credit for the investment you put into a historic home. The improvements or renovations need to be a certified rehabilitation that is recognized by the National Park Service. These are rehabilitations that are in line with maintaining the historic character of the home. Those who qualify can deduct up to 20% of the cost of rehabilitation.
Home improvements that aren’t tax deductible
The IRS doesn’t keep an inclusive list of improvements you can’t deduct. Rather, what can’t be deducted are the items that don’t fall into the categories above.
As mentioned before, repairs can’t be deducted on your primary home. Home contracting projects are considered repairs instead of improvements if they are necessary to make the home habitable. So, a new railing on your staircase may be deductible if it’s a change to accommodate a medical condition, but not if you’re just replacing one that’s worn or broken.
Energy-friendly improvements can often net a tax credit, but only if they are improvements to a home you already own. If you build a new home, you don’t get an energy credit for choosing an energy-efficient choice over a standard one.
And, many of the home improvements noted above only apply to a house if it’s not used exclusively for business. People running an in-home business can still take the deductions as long as the space dedicated to business is less than 20% of the house.
Tip: Save your paperwork!
When you are applying for tax deductions or credits, make sure you have the data to back it up. “What happens a lot is people don’t remember, especially if they bought their homes 30 or 40 years ago,” says Rojas. “They don’t keep track. They’ll say they put on a whole new roof and I have to ask ‘how much did you pay for that?’ and they don’t remember.”
Rojas says you should hold onto all your documents related to home improvements as long as you own the home. This is vital because, in the case of capital improvements and capital gains, it can be years or decades before you are able to fully deduct the costs.
Whenever your taxes get complex, it’s worth seeking the advice of a qualified tax professional. While having someone do your taxes has an upfront cost, it can help you cut your tax costs and avoid expensive penalties.
Tip
How Acorn Finance can help
Whether you are able to recoup home improvement costs on your taxes, you still need the funds to pay for your project. Acorn Finance can help.
We partner with reputable lenders to get you access to the best rates on home improvement loans. There is no cost to prequalify and there is no impact to your credit.
It takes just a couple of minutes to find out how much you can borrow to add an upgrade to your home. Check out your offers today.
Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.
Just answer a few questions to get personalized rate estimates from multiple lenders.