Most of the time, home improvements are not directly tax deductible. You usually don't have the option to enter the amount you spent on all home improvements this year on your tax return and to cut your taxable income by that number. However, capital improvements can help improve your tax basis the future if you sell your home, which has its own tax benefits.
Additionally, there are a couple other ways to get a tax break after you improve your home — such as when you make repairs for medical reasons, energy efficiency, a home office, or rental property.
The IRS makes a distinction between repairs and permanent improvements, and both can be deducted from your taxes depending on circumstances. The difference is as follows:
The IRS allows you to deduct medical expenses that are above 7.5% of your adjusted gross income, and in some cases home improvements can count toward these medical expenses.
You can deduct only improvements that are needed for a medical reason for yourself, your spouse, or your dependent. Any additional changes you make to improve your home's appearance or architecture.
Medical home improvements are fully deductible only if they don't cause your home's value to rise. If a remodel boosts your home's value, then you have to subtract the increase in value from the cost of the improvement. The result is the portion of your spending that can qualify for the medical deduction.
The IRS gives several examples of home improvements that generally don't increase a home's value and that are eligible for the full deduction.
You'll need to itemize your deductions and attach Schedule A to Form 1040 or 1040-SR. The first four lines of this form allow you to enter your medical expenses and calculate how much of your medical spending went over 7.5% of your adjusted gross income. The result is then added to your other deductions at the bottom of Schedule A, and the total goes on Form 1040 or 1040-SR.
Home improvements that increase energy efficiency may be eligible for a federal tax credit. This includes things like installing energy-efficient windows, doors, and appliances, as well as adding insulation and sealing air leaks.
To qualify for a tax credit (which works differently from a deduction), the improvements must meet certain energy-saving standards set by the government. You can find a list of eligible improvements and their corresponding tax credits on the Energy Star website.
It's important to note that the tax credits and available for energy-efficient home improvements may vary from year to year and may have expiration dates. Be sure to check the current guidelines and consult with a tax professional to determine which improvements are eligible for tax credits or deductions.
If you're self-employed, your home is the main place you do business, and you regularly use a part of your home exclusively for work, then you might qualify to deduct improvements to your home office. You can deduct repairs the same year you have them done, and you can gradually deduct improvements over several years through depreciation.
Examples of deductible improvements:
You can fully deduct repairs to the part of your home that you're using as your office. If you make repairs that benefit your whole home, then you deduct just the portion that corresponds to your office. For example, if you spend $1,000 to fix your air conditioning system and your office takes up 12% of your home, then $1,000 X 12%, or $120, would be deductible.
If you make permanent improvements, you can depreciate them over time, taking a deduction for a small fraction of the cost each year.
You'll need to calculate your home office deduction using actual expenses instead of the simplified method. Form 8829 walks you through the process of calculating your deduction, and you'll file this form with Schedule C.
As a landlord, you may be wondering if you can claim tax deductions for home improvements made to your rental property. The good news is that many home improvements can indeed be tax deductible, as long as they are made for the purpose of maintaining or improving the property.
Some common examples of tax-deductible home improvements for rentals include:
It's important to note that home improvements that are considered personal in nature, such as installing a pool or hot tub, are usually not tax deductible. It's a good idea to keep detailed records of any home improvements made to your rental property, as you will need to provide proof of the expenses when claiming deductions.
If you take out a home equity loan or draw on a home equity line of credit to pay for your home improvements, you may be able to deduct the interest on that debt. In this situation, your home improvement expenses themselves are not deductible, but you could at least get a deduction for your borrowing costs by using the mortgage interest tax deduction.
For your home to qualify for the deduction, it has to be your primary home or your second home, and it must have toilet facilities as well as spaces for sleeping and cooking.
The IRS allows this deduction only if the home improvements are "substantial." That means they must add to your home's value, make it usable for a longer time, or make it suitable for new uses.
Repairs that simply keep your home in good shape aren't eligible. However, the IRS mentions that if you make substantial improvements and paint your home at the same time, you can count the expense of painting — even though painting by itself would just be considered a repair.
You must itemize (instead of taking the standard deduction) and complete Schedule A for Form 1040 or 1040-SR. Line 8 gives you space to enter interest reported on Form 1098, which your lender should send you. You'll add this deduction to the other deductions you're taking and enter the sum on Form 1040 or 1040-SR.
Paying for home improvements can lead to savings in capital gains taxes when you sell your home. How much you'll owe in capital gains taxes depends on your home's basis, which is a number that reflects the price you paid for your home and the amount you spent on improving it.
A home sale results in capital gains when the sale price minus the basis is a positive number (sale price - cost basis = capital gains). So to minimize your capital gain — and the taxes you owe on them — it's good to have a higher basis. Keeping records of home improvements allows you to adjust your basis upward, and potentially pay less in capital gains when you sell the property.
That said, many people can get out of paying capital gains taxes on their home because the IRS allows you to exclude the first $250,000 in gains, or $500,000 if you file jointly with your spouse. This applies if you're selling your main home, and if you owned the property and used it as your main home for at least a two-year period during the previous five years.
You can add the cost of improvements to your home's basis if they make your home more valuable, extend its life, or allow it to be used for a different purpose. Examples of improvements include adding a fence, paving the driveway, putting in a new roof, finishing the basement, or adding a new bedroom.
Repairs like fixing broken windows or mending the gutters don't add value to your home; instead, they just keep it working. You generally can't add repairs to the basis. But if you make some repairs as part of a larger remodel, then you can count those repairs as improvements and add their cost to the basis.
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To adjust your basis and ultimately lower your capital gains tax bill, you need to keep careful records of improvements. You should hold onto the receipts from any work you have done.
The IRS provides a table you'll use to track improvements. You'll track the type of improvement, the date the work is done, and all your costs and expenses. Costs include what you pay for materials and labor, but you can't count the value of your own labor. And when an improvement is replaced — like if you pave your driveway, then redo the driveway again 10 years later — you'll need to remove the cost of the first improvement from your tally.
There isn't a widely applicable way to deduct home improvements on your taxes, so getting a tax break for work done on your home requires digging into the details to figure out if you're eligible for a specific deduction. It's a good idea to talk to a financial advisor before starting a remodel to learn how it might affect your taxes.
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