Are home improvements tax deductible? Generally only in 2 cases
- Home improvements on a personal residence are generally not tax deductible for federal income taxes.
- However, installing energy efficient equipment on your property may qualify you for a tax credit, and renovations to a home for medical purposes may qualify as a tax deductible medical expense.
- In addition, renovating your home can increase your basis, or total financial investment, in the property. This reduces your taxable capital gain if and when you sell the home.
- This article was reviewed for accuracy and clarity by Luis Rosa, an expert on Personal Finance Insider's tax review board.
If you're building a new patio in your backyard or revamping the kitchen in your home, don't expect to get a tax break.
Under America's current federal tax code, home improvements are generally not tax deductible.
However, there are two instances in which you may qualify for a tax break for making specific additions or improvements to your home, but they're not all that common.
You may be able to claim a tax credit for installing energy efficient property
If you installed energy efficient equipment at your home last year, including solar panels, solar water heaters, geothermal heat pumps, small wind turbines, or fuel cell property, you may be able to claim a tax credit on your 2020 tax return.
A tax credit is a dollar-for-dollar reduction of your tax bill. Some tax credits are refundable, meaning that if what you owe in federal taxes is less than your credit amount, you'll receive the remainder as a refund.
When it comes to the Renewable Energy Tax Credit, the IRS says "energy saving improvements" made to a personal residence before January 1, 2021 qualify for the credit, which is equal to 26% of the cost of the equipment installed. Your personal residence can include your primary home and a vacation home.
Fuel cell equipment is subject to limits, however. The maximum credit that can be claimed for fuel cell property is $500 per half kilowatt of power capacity and it must be installed at your primary residence.
Unfortunately, the tax credit is not refundable regardless of the property it's claimed for.
Home renovations made for medical purposes may be tax deductible
Tax deductions reduce your taxable income and lower your overall tax liability. The IRS allows tax deductions on medical expenses related to "the diagnosis, cure, mitigation, treatment, or prevention of disease" — but not until the expenses exceed 7.5% of your adjusted gross income.
Only medical expenses that were paid out-of-pocket and not reimbursed by your health insurance plan qualify as tax deductible. Unless you have sizable medical bills or other itemizations, it's usually not worth forgoing the large standard deduction to write off your health-related costs.
That said, if you made substantial improvements to your home to aid a physically disabled person — yourself, a spouse, or a dependent — or installed special equipment, those costs could be considered medical expenses.
For example, construction of ramps, widening doorways or hallways for wheelchair access, and installing modifications to bathrooms or stairways, including lifts and handrails, will qualify for a full medical deduction as long as their addition does not increase the value of the property. If it does, a partial deduction is allowed.
You can find a full list of home improvements that qualify for the medical deduction on the IRS website.
Home improvements can help you save money on taxes when you sell
Although garden-variety home improvements won't score you a tax deduction right now, they could be helpful in reducing taxes if and when you sell your home.
A homeowner who sells their property for a profit is eligible to exclude up to $250,000 of the gain from taxes, or up to $500,000 if married filing jointly (contingent upon meeting the ownership test and the use test). The gain is calculated using the homeowner's basis, or their total financial investment in the property on the date of sale, which includes the price paid for the home and any improvements you made over the years you owned your home.
The IRS says improvements that qualify to be added to your basis are ones that "add to the value of your home, prolong its useful life, or adapt it to new uses," including interior and exterior modifications, heating and plumbing systems, landscaping, and insulation.
Generally, the higher your basis in the home, the lower your taxable gain on the sale.
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