Are Home Improvements Tax Deductible?

One of the advantages of having a mortgage is that it paves the way for tax breaks. You can write off your interest payments to reduce your tax liability.

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Are home improvements tax deductible as well? This guide reviews what you need to know if you’re planning to make energy-efficient improvements to your home.

Before you prepare to write off anything on your tax return, it’s a good idea to talk with a tax accountant who knows the U.S. tax code. If you’re planning to make improvements to your home, you shouldn’t expect to recoup an immediate tax benefit, because most home improvements don’t give you a tax advantage until it’s time to sell your house. There are several improvements that do qualify for tax benefits, however.

Home Improvements for Medical Purposes

If you or a family member has a medical condition that requires you to alter your home for increased accessibility or for the treatment of the condition in any way, you could qualify for a tax deduction. It’s important to understand the fine print before you write these expenses off.

• The expense must be more than 7.5% of your adjusted gross income to qualify.
• If your health insurance reimburses you for the home improvements, you lose the tax benefit.
• Just because you qualify for the tax deduction doesn’t mean taking it will save you money on your taxes.

Green Energy Home Improvements

If you make the decision to install any device on your property that reduces your energy demand, you might qualify for tax credits. Only specific green energy initiatives provide tax benefits, so make sure that you’re aware of the tax implications before you proceed with the improvements. Energy-efficient home improvements that qualify for tax credits include the following:

• New solar panel installations
• Geothermal wells or heat pumps
• Solar water heaters
• Wind turbines
• Green energy fuel cells

If you’ve added any of these improvements to your home over the last year, you might qualify for tax credits, which are different from deductions. Instead of writing off the home improvements from your income, tax credits directly reduce how much you owe.

Speak with a tax professional before you file your taxes to determine how much you can claim as a tax credit. The way the IRS determines these credits varies based on what type of equipment you installed and how much you spent. The rules for fuel cells and solar energy are quite different, for example, so you need to make sure you’re claiming your tax credits correctly.

What Home Improvements Are Not Tax Deductible?

Any home improvement that doesn’t serve a medical purpose or isn’t a green energy modification doesn’t qualify for immediate tax deductions or credits. Home improvements may save you money later when you’re looking to sell the home, but you can’t write them off the year you’ve performed the improvements.

The IRS does allow you to exclude up to $500,000 (if you’re married and file taxes jointly) in profit from a home sale and the cost of many home improvements gives you a tax advantage because it increases how much money you’ve invested in the property. For example, if selling your home nets you a $650,000 gain, you’re going to owe taxes on $150,000 of the profit.

If you made $100,000 in repairs while you lived in your home, you can claim these costs to reduce your tax liability. You’d only be required to pay taxes on $50,000 of your profit rather than $150,000.

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Home Office Deductions

If you’re a small business owner that already qualifies for a home office deduction, there’s an important exception to the tax rules above to consider. Construction costs for home improvement projects may be depreciated over time on your taxes, but you should consult with an accountant before claiming these tax deductions. While some home improvements can be written off, how much can be written off and whether you should write these expenses off is debatable.

When You Shouldn’t Claim Home Improvements on Your Taxes

Unless you’re able to receive tax credits for home improvements, such as when installing solar energy, fuel cells or wind turbines, you should determine whether your deductions actually reduce your tax bill. The way you claim tax deductions is by itemizing all your qualified expenses over the year. If you don’t exceed the standard deduction, you could wind up saving little to no money on your taxes.