How to utilize home improvement tax deductions

Every homeowner who’s planning a home renovation project in the near future always has some questions in mind – how can I get home improvement tax deductions, and are all home upgrades tax deductible? If not, which improvements will help reduce my tax burden? We will answer all of your questions here. 

The first thing to keep in mind is that not all types of home upgrades can get you a tax break. Only the ones that are capital improvements and home improvements for medical care reasons or to enhance a home’s energy efficiency can help reduce your tax liabilities. Additionally, if you use your home for something other than residential living, you may be eligible for tax breaks.

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What are capital improvements?

Capital improvements are significant, permanent home enhancements that result in an increase in its overall value, utility, or lifespan. These improvements go beyond routine repair work and home maintenance. They can include upgrades to real estate, home infrastructure, technology, or equipment.

Although routine upkeep and minor repairs are generally not covered, they could become eligible if they are part of a more extensive renovation project. If they aid in enhancing the property’s value or prolonging its practical lifespan.

Some examples of capital improvements include renovations such as adding an extra room, upgrading the plumbing system, buying an energy-efficient water heater, investing in a home security system, or installing energy-efficient windows. 

According to the Internal Revenue Service (IRS), capital improvements must meet the following conditions if they are to be tax-deductible:

• Add value to your home
• Prolong the useful life of the property
• Be of a permanent nature

Are capital improvements taxed directly?

According to the IRS, capital improvements instead of being directly taxed can affect your taxes when you sell the house. 

That is to say, the complete expense of your capital improvements is added to the property’s cost basis. When you decide to sell the property, it can reduce the taxable capital gain that arises from the property’s sale. And, minimize your tax obligations. This is the reason why homeowners should meticulously record all the improvements during renovations or remodeling. And, retain the receipts as proof.

Home renovations vs. home repairs: What are the differences?

Being aware of the differences between renovation and repair work can help you avoid any tax surprises at the time of selling your home. You must know which home improvements are eligible for tax deductions and which are not. 

Home renovations

Some home renovations that may qualify for capital improvements are:

• Remodeling a room or adding a room.
• Making upgrades to important home systems, such as heating and cooling systems, and security systems, replacing insulation or ductwork.
• Upgrading the house’s plumbing system, such as septic system, water heater, or filtration system.
• Installing a new roof, siding, or storm windows.
• Improving the lawn and yard.
• Getting new floors or investing in built-in kitchen appliances. 

Home repairs

Some restoration work that may count as capital improvement include:

• Replacing a damaged or broken windowpane.
• Investing in new kitchen cabinets.
• Painting your home – both interior and exterior.
• Fixing plumbing leaks, roof leaks, or filling cracks in the wall. 
• Changing old hardware.

Want help estimating your home renovation costs?

The Kukun Home Renovation Cost Estimator simplifies and seamlessly navigates your home remodeling journey. It provides you with an accurate and dependable estimate for your home renovation – instantly computing the costs of materials, finishes, and designs for each project.

What’s more, it gives you the flexibility of selecting multiple projects at once – be it kitchen remodeling, bathroom renovation, or roof replacement. 

And there’s more; the online tool gives you the approximate return on investment (ROI) for every project.

Once you have the estimate, you can hire licensed professionals who can provide you with high-quality services. 

Which home improvements are tax deductible?

You can expect tax deductions for home improvements that enhance energy efficiency or cater to medical requirements. Additionally, you might also qualify for deductions related to home office space utilization or the upkeep of rental properties.

Home office usage

If you have a dedicated space within your home used exclusively and regularly for business activities, certain expenses can be deducted when filing your taxes. This deduction necessitates two key criteria: the home should serve as your primary place of business, and a specific area must be solely and consistently used for business purposes. Homeowners and renters alike could potentially deduct expenses such as mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent by claiming the home office deduction.

Medical improvements

Tax deductions may be applicable if your home renovations accommodate medical needs, such as installing a ramp, grab bars, or handrails.

This deduction is viable if the primary intent of the improvement is to provide medical care for you or a resident of your household. Or, if the enhancement permanently boosts your home’s value. The IRS defines eligible medical expenses as those that help alleviate or prevent a physical or mental disability or illness. It could include insurance premiums, transportation to medical care, and long-term care services.

Energy-efficient improvements

The IRS extends incentives in the form of tax credits to encourage homeowners to enhance their home’s energy efficiency. Homeowners can potentially receive tax credits for energy-efficient equipment such as solar panels, energy-efficient water heaters, and geothermal heat pumps. 

Rental property maintenance

In cases where you rent out a section of your property, you might be able to deduct a portion of your adjusted cost basis through annual depreciation during the rental period. Repairs can also qualify for tax deductions, as they are deemed necessary for the property’s maintenance.

How to claim home improvement tax deductions?

Claiming a tax deduction for home improvements immediately after making them is typically not possible. Generally, you’ll realize the advantage when you sell your home, as the improvement costs contribute to your property’s cost basis. To establish your home’s tax basis for the IRS, it’s essential to meticulously record each improvement. This entails retaining receipts, purchase orders, canceled checks, and any other pertinent documentation that substantiates your assertion.

As is wise in such matters, if you require guidance, it’s recommended to seek advice from a tax professional.

Last thoughts

Whether or not you’ll get home improvement tax deductions depends on the kind of changes or additions you’ve made to your house. And, if you’ve kept track of your renovation expenses in an organized manner. 

Any improvement that adds value to your home, prolongs its life, or modifies the house for new usage is a tax-deductible upgrade. For example, energy efficiency and medically approved upgrades can be eligible for tax credits – decreasing your tax burden or getting you significant tax refunds in a tax year.

Written by Ramona Sinha. August 28, 2023

Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.