Posted by Abundant Wealth Planning LLC

Are Home Renovation Taxes Deductible?

Are Home Renovation Taxes Deductible?

In general, home improvements are not tax-deductible, but there are three main exceptions: capital improvements, energy efficiency improvements, and health-related improvements.

If you've recently made improvements to your home, here's what you need to know about tax credit deductions.


Taxes and Capital improvements 

Capital improvements add value to a home, extends its useful life, or makes it suitable for new users. In some cases, these improvements can reduce the tax you pay on income from a home sale. However, it is important first to understand what types of improvements can be considered capital improvements.

According to the Internal Revenue Service, the following projects are examples of capital improvements:

  • Additions: bedroom, bathroom, patio, garage, balcony, deck

  • Exterior: roller/door, new roof or cladding, satellite dish

  • Insulation: attic, walls, floors, ducts, pipes

  • Interior: built-in appliances, kitchen modernization, floor, carpet, fireplace

  • Lawn and yard: landscape, sidewalk, footbridge, fence, retaining wall, swimming pool

  • Plumbing: septic system, water heater, freshwater system, filtration system

  • Systems: heating, central air, oven, pipes, central humidifier, central vacuum, air and water filtration, wiring, security, lawn sprinklers.

As capital improvements increase the value of your home, they can help you save taxes if you profit from the sale of your home by increasing your housing basis. The basis is the value of the capital investment you have made on a property. If you sell your house and make a profit, you will have a capital gain equal to the sale's profit.

Generally, you will not have to report a capital gain on the home sale during the financial season if you meet certain primary residence requirements if you have owned the house for at least five years and the capital gain is less than $250,000 (or $ 500,000 for married filing jointly).

If you pay taxes, you can deduct the basis (capital investment) from your sales income, thereby reducing the capital gains tax you owe.


Capital improvements vs. repairs

While repairs to a property may seem like a major improvement to the owner who spent time and money on them, they will not necessarily be considered as capital income to the IRS.

Home repairs, such as repairing gutters or painting a room, are considered general maintenance rather than capital improvements.

However, repairs can be considered major improvements if done as part of a larger project, such as renovations or major renovations.

For example, replacing a broken glass is generally considered a repair. However, if you are replacing a window panel as part of a much larger project that involves replacing all of the windows in your home, it could be considered an upgrade.


Taxes and energy-efficient improvement

If your home improvements meet specific energy efficiency standards, you may be eligible for an energy-efficient home property credit. This tax credit enables homeowners to receive a credit equal to a certain percentage of the cost of "qualifying property." In this case, qualified property means the following types of energy-efficient equipment:

  • Electric solar

  • Fuel cells (limited to $500 for each half-kilowatt of capacity)

  • Geothermal heat pumps

  • Small wind turbines

  • Solar water heaters

This credit applies only to qualifying home improvements completed before December 31, 2021. The table below describes the percentage of the qualifying home renovation cost by year in which the improvements took place.

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 separate from a tax deduction. A deduction involves deducting the amount of your deduction from income before determining how much you owe in taxes, while a tax credit is deducted from taxes you owe.


Deduction of the home renovation tax for medical reasons

Certain capital improvements considered to be medical expenses are eligible for deductions. If a housing reform's main goal is to provide medical care for you, your dependent, or your spouse, you can include it as medical expenses in taxes. If a permanent improvement increases your property's value, you can also include it as a medical expense.

You do this by subtracting the increase in your home's value from the cost of the renovation. The remaining difference can be counted as a medical expense. If your property's value does not increase due to a renovation, you can calculate the total cost of the renovation as medical expenses.

The following home improvements are examples of medical bills, according to the IRS:

  • Adding guardrails or support bars

  • Building entry or exit ramps

  • Extend doors to entrances or exits or modify corridors and interior doors

  • Installation of guardrails or support bars in bathrooms

  • Lower kitchen cabinets to make them more accessible

  • Modification of fire alarms and smoke detectors.

  • Modifying the stairs

Home improvements made for cosmetic reasons are not eligible for this deduction. The improvement must be suitable for a home to a disabled condition to qualify as health care, and the deduction only covers "reasonable costs."

 

Bottom Line

Although home improvements do not qualify for tax deductions, it is recommended to keep detailed records of home improvement expenses.

They can be important at the time of sale or in the event of a disaster, natural or otherwise. Suppose you are having trouble with expenses or personal or professional improvements. In that case, it is advised that you consult an expert to determine what counts on your taxes and what matters later.

In general, home improvements are not tax-deductible, but some tax-saving opportunities are worth considering. Capital improvements can help reduce capital gains taxes after a home is sold, while some energy savings and medical-related improvements can generate tax benefits.


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