Home improvements may be tax deductible
Select capital improvements, certain medical, energy efficient and historic home upgrades eligible
It’s that time of year when taxes are top of mind for Americans, many of whom are eager to dig up any deductions that can cut their taxable income and net a bigger return.
If you’ve recently made some home upgrades or plan to renovate your kitchen or bathroom some time in the future, you may be wondering if you can write off some of those expensive improvements.
“The past year has been a rocky one financially for homeowners, with rising costs of utilities, insurance premiums, and even the costs of repairs thanks to a combination of severe weather, supply chain issues, and the cost of labor,” says Courtney Klosterman, home insights expert at Hippo, a home insurance group focused on proactive home protection.
The good news is, certain home improvements do have tax benefits that can help alleviate costs and bring upgrades to life, says Klosterman. Every person’s tax position is unique and the answer depends on the type of renovations you make — whether they are considered a repair or an improvement — and how well you track your expenses.
Home repairs, a modification that restores your home to its original state, is not tax deductible. Improvements that increase your home’s value, like adding a new driveway or siding, are deductible.
“We recommend consulting a tax professional to help you understand what you may qualify for and how that impacts
your tax obligations,” adds Klosterman.
To help make sense of it all, Hippo created a list of eligible tax-deductible upgrades to consider.
Capital improvements or upgrades that boost resale value
Capital improvements are projects that extend your home’s life, add value or refit your home for new uses, says Klosterman. These differ from home repairs, that don’t necessarily add value (like fixing a leak), but are usually only tax-deductible in the year the home is sold.
“You can add the value of qualifying capital improvements to the cost basis of your home,” says Klosterman. “When you sell your home, you may be able to subtract your adjusted cost basis from the sale price. This can help reduce the amount of capital gains taxes you may owe.”
However, she adds, you’ll need to factor in tax implications of the capital gains from the sale of your home.
“Although you won’t see tax benefits from these improvements right away, these projects can help proactively protect your home by getting ahead of potential issues,” she says.
Example projects:
Kitchen remodels and new attic insulation are examples of improvements that boost value and can net a tax benefit. Installing a new HVAC system to replace one over 10 to 25 years old, isn’t running efficiently, or is worn beyond repair can help you save money and help protect your home is another option.
Energy-efficient upgrades
While not a deduction, homeowners can potentially qualify for an Energy Efficiency Home Improvement Credit of up to $3,200 for energy-efficient improvements made after Jan. 1, 2023, says Klosterman. The credit for 2024 is 30 percent of qualified expenses but has certain limits for different types of improvements.
Example projects: You can get a home energy audit from a professional home energy audi
tor for a tax credit of up to $150. An auditor will help you understand where you’re losing energy and identify health and safety issues in your home. Or, you can install ENERGY STAR’s Most Efficient exterior windows and skylights for a credit of up to $600 based upon eligibility. Replacing windows can help improve insulation and reduce the need to run your HVAC.
Clean energy upgrades
You can potentially qualify for the Residential Clean Energy Credit if you install new renewable energy properties in your home. Again, it’s not a deduction but a credit.
“Using the clean energy you generate can help lower your reliance on traditional utilities and lower usage and bills,” says Klosterman. “Systems like solar panels are generally easy to maintain, typically only requiring regular cleaning to prevent debris buildup.”
Example project: Installing geothermal heat pumps can help heat and cool your home more efficiently than traditional heating and cooling systems by transferring heat to the ground rather than generating heat. They tend to be expensive, but according to the Department of Energy, you can potentially see ROI in five to 10 years, depending on available financial incentives (DOE).
Historic home upgrades
You can potentially qualify for the Federal Historic Rehabilitation Tax Credit if you are renovating a historic home, says Klosterman.
“Historic homes can qualify for this tax credit and other grants since many organizations wish to preserve historical buildings,” she says. “Taking
ON THE COVER
Certain home improvements have tax benefits that can help alleviate costs and bring upgrades to life.
advantage of these can help lower the financial burden of potential repairs while helping you maintain your home’s original beauty.
Example project: Upgrading or replacing old pipes may qualify for this tax credit and may be necessary to bring the home up to code and help prevent water damage. Or, replacing deteriorated parts in the structure of your home, like posts or beams, may qualify for this credit. Replacement should be visually similar to the original and at least equal to the original’s load-bearing capabilities.
Medically necessary upgrades
“You can potentially include medically necessary home upgrades as a part of your
medical expense deduction,” according to Klosterman. “These include improvements that help make your home more accommodating for a disability that you, your spouse, or dependents that live in your home have.”
The amount you can include in your medical expense deduction depends on how the improvement impacts your home’s value. If your home’s value increases as a result of the improvement, your medical expense is considered the cost of the improvement minus the increase in home value. If your home’s value does not increase, you can include the entire cost in your medical expense deduction.
Example project: Bathroom modifications, like grab bars and railings, can help prevent slips and falls. These modifications can also help prevent water splashes that could lead to mold or mildew over time.
Home office repairs and improvements
If you have a dedicated part of your home that you regularly use as your main place of business, you may be able to deduct home office repair expenses. The amount you can deduct depends on whether the project impacts the entire home or just the office.
“Home office improvements, however, are not tax deductible and would be categorized similarly to capital improvements,” says Klosterman.
Example project: If you install a full home security system, you can potentially deduct the cost of maintaining and monitoring the system that relates to the business part of your home. Or, you can replace your home office windows with dual or triple-pane windows to help improve insulation and reduce noise.
If you are self-employed and work from home, you may be able to take advantage of potential write-offs, including gas, phone, internet and electricity fees, office supplies and more.
Rental property repairs
If you rent out a part of your home, say a room or a converted basement, you may be able to deduct repair expenses from the amount of taxable rental income you receive.
According to the IRS you can deduct “ordinary and necessary expenses for managing, conserving and maintaining your rental property.” Necessary expenses include mortgage interest, taxes, advertising, maintenance, utilities and insurance.
Example project: Repairing leaks in your tenant’s bathroom can help prevent long-term mold and mildew issues. Leaks could also impact your home’s structural integrity if drywall or floor joists are left wet over time.