Any improvement that significantly increases the value of your home and extends its useful life is considered a home improvement.
If you tear down your home, you will not be subject to tax deductions. Your taxes will be reduced only under some circumstances, like when you sell your home.
The cost of home improvements is high, but you need to understand how they will anticipate a sizable tax write-off. To begin with, know that a tax deduction and a tax credit are two different things.
Tax Deductions
A tax deduction lowers your total income when you file your taxes by the specified dollar amount. Your obligation to pay less tax to the IRS decreases when your total income decreases.
A tax deduction for house improvements may be claimed all at once in a single tax year, gradually over several years, or only if the home is sold, depending on a number of factors.
Tax Credit
A tax credit directly lowers your tax liability from your total amount. For instance, if you owe the IRS $900 after filing your tax return, adding a $500 tax credit reduces your debt to $400.
There are two types of tax credits:
- Refundable Tax Credit
- Non-Refundable Tax Credit
Are Home Improvements Tax Deductible?
Generally, home improvements on personal residences are not tax deductible, but if you sell your house for a profit, then your home improvements will give you the tax advantage of paying fewer taxes.
The following are the home improvements that are tax deductible:
Capital Improvements
Capital improvements include things that increase the value of your property. Home repairs are not considered capital improvements as they are not permanent. Capital renovations are only tax deductible when the house is sold.
The investment cost of the home is increased by basis points, meaning the amount you invested for tax purposes. Here’s how it can be calculated:
You bought the house for $700,000, and you sold it for $900,000. You made a capital improvement of $60,000, so your total basis will be $760,000. Your tax will be applicable on ($900,000 – $760,000) $140,000.
Repairs
A repair is a necessary maintenance that keeps the building in good working condition. Repairs are usually not tax deductible because they don’t add significant value to the property or extend its life.
It simply restores a home to its original state or value. For instance, if you are getting a wall painted, it’s just a small expense, and it doesn’t increase the basis for your house. Home repairs are only tax deductible for home offices and rental units you own.
Rental Property
Repairs to rental property are deductible in the year in which they are finished. Repairs that increase the value of your rental property, such as a kitchen remodel, laundry room addition, or appliance upgrade, depreciate over time.
Deductions may apply to significant renovations made to rental properties that depreciate, which are made over time rather than all at once.
Home Office Improvements
To be eligible for the home office deduction you must run a legal business and use a portion of your house exclusively for business purposes. That part cannot be used for recreational family activities.
You can write off 100% of the cost of any modifications you make to your home office if you are eligible for this deduction.
For instance, If you added a new water tank in the office and used 15 percent of your home for office space, you can depreciate 15 percent of the cost.
Read More on Home Office Tax Deductions
Casualty and Theft Losses
Disaster or theft losses can only be deducted from your tax return if the casualty or loss occurs due to a natural disaster. The disaster needs to be a federally declared disaster by the President of the United States such as an Earthquake, floods, etc.
You will only be subject to tax deduction if you have kept a record of the money you spent on your house. If after the loss, you claimed any insurance on your losses then you will not be able to benefit from the tax deductions.
Energy Saving Repairs
If you installed energy-efficient equipment at your home, the IRS allows you to claim a tax credit on them. If you qualify for the tax credit then your tax obligation reduces directly to your total amount.
Some tax credits are refundable, which means you’ll get the difference between what you owe in federal taxes and your credit amount as a refund.
The following can be classified as energy-efficient repairs:
- Solar panels
- Solar water heaters
- Wind turbines
- Geothermal heat pumps
According to the new tax laws, you are subject to the following deductions:
| Property being used | % of the cost which qualifies for deduction |
| After Dec. 31, 2016, and before Jan. 1, 2020 | 30% |
| After Dec. 31, 2019, and before Jan. 1, 2023 | 26% |
| After Dec. 31, 2022, and before Jan. 1, 2024 | 22% |
Medical Improvements
Tax deductions for medical expenses for diagnosis, cure, mitigation, treatment, or prevention of disease are permitted by the IRS, but only up to a maximum of 7.5% of your gross income. These deductions are only eligible for people who do not have medical insurance and pay for their bills on their own.
Examples of medically necessary home improvements are expanding doorways or building ramps, lifts, wheelchair fittings, etc are 100% deductible only if they don’t increase the value of your property.
Home Improvements for Resale
Home improvements for resale value may be tax deductible when you sell your property at a profit. The profit you make when you sell your home is referred as the tax basis.
It’s important to keep track of your receipts and keep a record of where money was spent, including labor expenditures, so that you know how much profit you will be making.
Note that if you incur any losses after the sale, you will not be eligible for any tax deductions.
In accordance with existing law, if you owned and occupied the property for at least two of the five years preceding the sale, the first $250,000 in profit from the sale of your property is tax-free for single filers and the first $500,000 of profit is tax-free for married couples.
Consult a CPA
If you still have questions, you can always contact our CPA. Our CPA will help you look into strategies to reduce the cost of renovations to maximize home improvement savings. Moreover, a CPA is familiar with the most up-to-date tax laws and can do your work for you.
