Home is where the heart is, but it may not be where the biggest tax breaks are. In general, home improvements aren’t tax deductible, but there are three main exceptions: capital improvements, energy efficient improvements, and improvements related to medical care.
If you recently made improvements to your home, here’s what you need to know about deductions or claiming credits on your taxes.
Capital Improvements and Taxes
A capital improvement is something that adds value to a home, extends its useful life, or adapts it for a new use. In some cases, these improvements can lower the tax you pay on the proceeds you get from a home sale. First, though, it’s important to understand which types of improvements qualify as capital improvements.
According to the IRS, the following projects are examples of capital improvements:
- Systems: Heating, central air, furnace, ducts, central humidifier, central vacuum, air and water filtration, wiring, security, lawn sprinklers
- Additions: Bedroom, bathroom, deck, garage, porch, patio
- Lawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, swimming pool
- Exterior: Storm windows/door, new roof or siding, satellite dish
- Insulation: Attic, walls, floors, pipes, ducts
- Plumbing: Septic system, water heater, soft water system, filtration system
- Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpet, fireplace
Because capital improvements add to the value of your home, they can help you save money on taxes if you make a profit selling your home by increasing the basis of your property. The basis represents the amount of capital investment you’ve invested in a property. If you sell your home and make a profit, you earn a capital gain that equates to your profit on the sale.
In general, you won’t need to report a capital gain on the sale of your home during tax season if you meet certain primary residence requirements, you’ve owned the home for a minimum of five years, and the profit is less than $250,000 (or $500,000 for married taxpayers filing jointly).
If you are taxed, you can subtract the basis (capital investment) from your sale revenue, thereby lowering the capital gains tax you owe.
Capital Improvements vs. Repairs
While making repairs to a property may feel like a capital improvement to the owner who spent time and money on them, they won’t necessarily count as capital improvements to the IRS.
Mark Steber, chief tax information officer at tax prep company Jackson Hewitt, told The Balance in an email that home repairs like fixing gutters or painting a room are considered general maintenance instead of capital improvements.
Repairs may count as capital improvements if they were done as part of a bigger project, such as an extensive remodeling or restoration job, though.
For example, replacing a broken windowpane is normally considered a repair. However, if you’re replacing a windowpane as part of a much larger project that involves replacing all the windows in your home, then it can count as an improvement.
Tax Credit for Energy-Efficient Improvements
If your home improvements meet certain energy efficiency standards, you may be able to qualify for the residential energy-efficient property credit. This tax credit allows homeowners to receive a credit that is equal to a certain percentage of the cost of “qualified property.” In this case, qualified property refers to the following types of energy-efficient equipment:
- Solar electric
- Solar water heaters
- Geothermal heat pumps
- Small wind turbines
- Fuel cells (with a $500 limitation for each half kilowatt of capacity)
This credit only applies to qualifying home improvements made before Dec. 31, 2021. The following chart outlines what percentage of the home improvement cost qualifies based on the year the improvements happened.
|If the Property Was Placed in Service...||Percentage of Cost That Qualifies|
|After Dec. 31, 2016, and before Jan. 1, 2020||30%|
|After Dec. 31, 2019, and before Jan. 1, 2021||26%|
|After Dec. 31, 2020, and before Jan. 1, 2022||22%|
A tax credit is different from a tax deduction. A deduction involves subtracting the amount of the deduction from your income before you determine what you owe in taxes, while a tax credit is subtracted from the taxes you do owe.
Tax Deduction for Home Improvements for Medical Reasons
Certain capital improvements considered to be medical expenses can qualify for deductions. If a home improvement’s main purpose is to help provide medical care for you, your dependent, or your spouse, you can include it as a medical expense on your taxes. If a permanent improvement increases the value of your property, you may also be able to include it as a medical expense.
To do so, you will subtract the increase in your home’s value from the cost of the improvement. The remaining difference can be counted as a medical expense. If your property value does not increase because of improvement, you can count the entire cost of the home improvement as a medical expense.
The following home improvements are examples of medical expenses, according to the IRS:
- Building entrance or exit ramps
- Widening doorways at entrances or exits, or modifying hallways and interior doorways
- Installing railings or support bars in bathrooms
- Lowering kitchen cabinets to make them more accessible
- Modifying fire alarms and smoke detectors
- Adding handrails or grab bars
- Modifying stairways
Home improvements done for aesthetic reasons don’t qualify for this deduction. The improvement must adapt a home to a disabled condition to qualify as medical care, and this deduction only covers “reasonable costs.”
The Bottom Line
Even though your home improvements may not qualify for a tax deduction, Steber recommended keeping detailed records of your expenses surrounding any home improvements.
“They can be important when the time to sell comes or disaster strikes, natural or otherwise,” Steber said. “If you have any issues with expenses or improvements, personal or business, it is a best practice to consult a tax pro to find out what matters on your taxes and what matters later.”
Generally speaking, home improvements aren’t tax-deductible, but there are some tax-saving opportunities worth keeping in mind. Capital improvements can help save money on capital gains tax after selling a home, while certain medical-related and energy-efficient improvements can lead to tax benefits.