Home Improvements That are Tax-Deductible Now…and Later

If you’ve considered putting some substantial dollars into improving your home, or if you’ve recently spent a lot of your hard-earned dollars on home renovations, you might be wondering what kind of bang you’re getting for your buck, so to speak. While some home improvements will no doubt get you a better price when it’s time to sell – like kitchen and bath renovations, for example – the vast majority of home improvements will not present you with an immediate tax advantage. Here’s why.

Repairs vs. Improvements

Though it may seem to you that repairs and improvements fall into the same category, but that’s not true, say tax experts. And this is where semantics matter! While it would appear that a repair or renovation constitutes an improvement to your home, the IRS has a different take on the situation.

According to that agency, a repair is a modification that restores a home to its original state and/or value. Repairs are items that usually prompt fairly immediate attention, like fixing a broken window or replacing a water heater. With very few exceptions, home repairs are not tax deductible.

On the other hand, improvements are modifications that increase the value of your home, prolong its life, or adapt it to new uses, like upgrading your insulation, installing a new roof, putting in a new septic system, or adding wheelchair ramps or an elevator for medical purposes.

However, in many cases, you still won’t be able to claim a tax deduction on these items until the tax year in which the home is sold. That’s why it’s essential to keep good records as to the expenses involved with these improvements. You’ll want to keep all the receipts for materials and works performed by contractors or sub-contractors.

Furthermore, the IRS says that the improvements must still be evident when you sell. For example, if you put wall-to-wall carpeting in your entire house 8 years ago and then replaced it with hardwood flooring 2 years ago, you cannot count the cost of the carpet as an improvement.

So, which home improvements are tax deductible?

If you’re ready to spend some money on capital improvements that’ll pay off in the long run, here are a few options.

• Home office improvements – Careful here because some home office laws changed in 2018! However, if you are self-employed and run your own business, you can fully deduct improvements AND repairs made directly to the part of your home you use as an office (but not the rest of your home). Home office improvements are deductible over time with depreciation, and repairs are deductible within the tax year they are completed.
• Improvements that increase your resale value – These major home improvements will be the ones that are tax deductible at the time of sale. Included in this category are things such as putting an addition of some sort on your home, finishing a basement or an attic space, installing a swimming pool, or installing a new furnace or HVAC unit. Remember to keep track of all expenses associated with these improvements.
• Home improvements for medical purposes – You can fully deduct expenses for medical equipment installed in your home if installed for the purpose of providing care for you, a spouse, or a dependent living with you. Such improvements include installing entrance or exit ramps, adding an elevator or stair lift, widening hallways and doors, lowering cabinets. Installing support bars, or modifying warning systems (fire alarms, smoke detectors, etc.)
• Rental property renovations – This can be a little tricky. As a landlord, you are charged with maintaining a “habitable” space for your tenants. As such, all repairs necessary to maintain that are tax deductible during that tax year. Any additions or upgrades will be deductible over time and with depreciation, as they would be with your personal property.
• Renovations for energy efficiency – Property owners can receive renewable energy tax credits when they install solar panels that generate electricity in their residence(s), solar-powered water heaters, wind turbines used to generate energy for a residence, geothermal heat pumps for heating and cooling a residence, and fuel cells that generate at least 0.5 kW and have an electricity-generating efficiency of more than 30%. These items must meet IRS requirements to be eligible for credits, so check with your salesperson or contracting before installing.

If you’re hoping to make improvements that fall into the category of tax deductible, speak to your tax expert or to an experienced and trusted contractor in your area for more information and details about what items can reduce your tax bill either now or when you sell.