Can You Save Money on Taxes With Home Improvement Projects?

You might have heard you can claim home improvements on your tax returns to save money. Though that’s true sometimes, not all home improvements qualify for a tax deduction.

In this article, we’ll explain which home improvements can reduce your taxes to help you save some money when spring rolls around. We’ll explain what specific projects qualify for tax write-offs, how you can tell if a particular project will be eligible, and what you should do before you have any work done that will save you from countless headaches when it comes time to file.

What Is the General Rule for Home Improvement Tax Deduction?

In general, home improvements and home repairs are not tax-deductible. However, projects that add to the value of your home can adjust your cost basis, effectively decreasing the taxes you owe for capital gains on your home sale.

Let’s look at the main differences between home repairs and home improvements when it comes to taxes.

Home Repairs vs. Home Improvements

Home repairs and improvements make your home a better place to live, but they are fundamentally different in terms of purpose, scope, and cost. Most home repairs are not tax-deductible, while some home improvements are.

It can be confusing to tell the difference between home repairs and home improvements, so here’s a quick rundown to help clear things up:

• Home repair: This involves fixing any damages or problems that already exist in the house. The primary goal of a home repair is to restore the functionality of a specific element of the house. This typically includes fixing broken appliances, patching holes in the wall, unclogging drains, replacing broken window panes, fixing leaky roofs (explore how to fix your roof), etc. For example, if your air conditioning stops working, fixing it would be a home repair.
• Home improvement: A home improvement involves enhancing your existing home beyond necessary repairs. Home improvements aim to increase the comfort, aesthetic appeal, and, sometimes, the home’s value. They can range from small-scale projects like painting rooms or installing new plumbing or electrical fixtures to larger-scale endeavors like adding an extension to your house, remodeling the kitchen, installing a new heating system, or adding landscaping features. For example, if you decided to replace your functional but old kitchen cabinets with newer, more modern ones, this would be considered a home improvement, not a home repair.

Remember that home repairs virtually never qualify for tax deductions, but home improvements can be tax-deductible if they increase the value of your home, add new functionality, or prolong the life of critical parts of your property.

For tax purposes, it’s helpful to frame home improvement projects in terms of capital improvements and capital repairs.

Capital Repairs vs. Capital Improvements

Capital repairs and capital improvements are often discussed in relation to commercial properties, but they’re also relevant to residential properties. Capital repairs seldom qualify for tax credits, while many capital improvements are eligible for tax deductions.

Capital Repairs

Capital repairs are any projects done to maintain the good working order of a property. These projects typically don’t add value to the property or add a new use to your home, so they do not qualify for tax deductions.

Replacing a patch of worn shingles on your roof is an excellent example of a capital repair; it is necessary to maintain quality living conditions, but it doesn’t prolong the life of the roof as a whole. Another example would be fixing a leaky faucet.

Capital Improvements

On the other hand, capital improvements are elective projects that usually increase the value of a property. Capital improvements are also often used to prolong the life of a property by replacing an aging HVAC system or installing a new roof, for example.

Work that adapts a space for a new use case is also usually considered a capital improvement and may be tax-deductible. Examples of projects that add new uses to a residential property include finishing a basement and converting an attic to create extra living space.

The table below summarizes the key differences between capital repairs and capital improvements to help visualize what is and isn’t applicable come tax season.

What Are Examples of Tax-Deductible Home Improvement Projects?

Before we discuss specific tax-deductible home improvement project ideas, it’s important to realize that whether or not a particular project is tax-deductible may depend on your local tax laws. Some incentive programs operate at the federal level, but local governments sometimes provide tax benefits for home improvements that don’t qualify for federal programs.

The best way to determine if a home improvement project is tax-deductible is to start by considering the project’s purpose. If the improvement is for personal benefit and doesn’t qualify as an energy efficiency upgrade, disaster recovery, medical necessity, or home office use, it likely won’t be tax-deductible.

If the home improvement you’re considering involves improving your home’s energy efficiency, is a medical necessity, or applies to a home office, it might qualify for tax benefits. Your best bet is to consult a certified public accountant (CPA) who can help you parse your local laws and maximize your tax deduction.

You can also check the Database of State Incentives for Renewables & Efficiency (DSIRE) to look for city- or state-specific energy efficiency tax breaks.

Tax-Deductible Home Improvement Projects

Below, we’ll include some examples of typical tax-deductible home improvement projects.

• Disaster repairs: If your home was damaged in a federally declared disaster, your repairs may be eligible for some tax relief. You could deduct the cost to repair the damage as a casualty loss on your federal income tax return, but the rules around this can be complex and are subject to change. We recommend consulting a tax professional specializing in disaster relief who can help you make sense of your situation.
• Energy-efficient upgrades: Certain home improvements could qualify for federal tax credits, including installing solar panels, small wind turbines, and geothermal heat pumps. Additionally, energy-efficient appliances, windows, doors, and insulation may be eligible for tax credits at the state or local level. Energy Star ratings can help you find products that are likely eligible for energy-efficiency tax benefits.
• Home Office Expenses: If you’re self-employed or use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses related to that part of the home as a home office deduction. This usually includes a portion of your utility bills or costs related to maintenance or repairs in that specific part of your home.
• Medical modifications: If you have medical needs that require changes to your home, you can often deduct these costs as medical expenses. These improvements include installing entrance ramps, modifying bathrooms, lowering cabinets, widening doors and hallways for wheelchair access, adding lift systems, and similar changes. You’ll usually need documentation from a medical professional stating you need such systems to take advantage of the tax benefits.

Non-Tax-Deductible Home Improvement Projects

Not all home improvement projects are tax-deductible. If your project doesn’t fall into one of the categories we covered in the previous section, the likelihood is that it doesn’t qualify for any tax benefits.

Below, we’ll include a few examples of projects that typically don’t qualify for tax deductions:

• Cosmetic changes: Cosmetic changes that do not significantly increase the home’s value or extend its useful life generally are not tax-deductible. This includes things like interior painting, wallpapering, and other decorative improvements.
• Luxury upgrades: Luxury upgrades such as installing a home theater, a wine cellar, a swimming pool, or an outdoor kitchen are typically not eligible for tax deductions. Anything that counts as “nice-to-have” rather than a necessity does not qualify for tax benefits.
• Non-energy efficient upgrades: Unless they qualify as medical necessities or business expenses, upgrades like new windows, doors, or insulation typically are only tax-deductible if they are specifically energy-efficient and meet the criteria for energy efficiency tax credits.
• Personal preferences: Upgrades or modifications made to a home based on personal preference or lifestyle needs, such as adding a pool, installing a gourmet kitchen, or routine backyard landscaping, are generally not tax-deductible.
• Routine maintenance and repairs: Routine maintenance is not typically tax-deductible. This includes replacing light bulbs, repainting due to normal wear and tear, and regular upkeep tasks.

What Are Tips to Maximize the Tax Benefits of Home Improvement Projects?

We understand that dealing with the government can often be a lengthy and difficult process, and that’s never more true than when you’re trying to reduce your tax liability. To make your life a bit easier, we’ll include some helpful tips to make claiming a home improvement tax deduction a little less painful in the following sections.

Keep Detailed Records

The most important thing you can do to make claiming a home improvement tax deduction easier is to keep detailed records. This includes receipts, contracts, and before-and-after photos of any work done. This will be important if you ever need to prove the expenses you claimed — and believe us, you’ll likely have to prove it at some point.

Get the Forms You Need to File Early

What forms you need to fill out will vary depending on the type of home improvement you’re doing and the specific deduction you’re claiming. Below, we’ll include a quick summary of the forms you’ll need for the most common projects that qualify for deductions.

• Disaster-related repairs: If you make repairs due to a federally declared disaster, you might be eligible for tax deductions. You’ll typically need to itemize these deductions on Schedule A of your federal tax return the same way you would for medical improvements.
• Energy-efficient improvements: Claiming a tax credit for energy-efficient home improvements requires you to fill out IRS Form 5695 and include it with your tax return. The credit will be a portion of the cost of the home improvement — up to a specified limit — based on the project. You should consult your accountant if you’re uncomfortable filling out the form.
• Home office improvements: If you’re claiming a deduction for a home office, you’ll need to use either the standard or simplified methods for home office deductions. The standard method requires you to calculate the actual expenses of your home office, while the simplified method allows you to multiply a prescribed rate by the square footage of your office. We recommend the simple method for most homeowners — although the standard method can sometimes get you a better deduction. You should speak with a CPA to determine what works best for your case.
• Medical improvements: If the home improvement is for medical purposes, you’ll typically need to itemize deductions on Schedule A of your federal tax return to claim the expenses. You can only deduct medical expenses exceeding a certain percentage of your adjusted gross income.

Adjusting the Cost Basis of Your Home

If you make significant capital improvements to your home, you can reduce your capital gains tax when you sell it by carefully documenting the total improvement costs.

Your home’s cost basis is the price you paid for the house, plus a percentage of the closing costs, plus the total cost of capital improvements you’ve made over the years. If you don’t include the cost of your capital improvements, you could pay significantly more in capital gains taxes when you sell your home.

Below is a quick step-by-step guide to adjusting your home’s cost basis:

1. Keep records of the purchase: Your home’s cost basis starts with what you paid for the property. This includes the purchase price and most of the closing costs associated with the purchase.
2. Document capital improvements: Keep a record of all capital improvements made to the property. Capital improvements add value to your home, prolong its useful life, or adapt it to new uses. They must be a permanent part of the home and last for more than one year, so try not to make substantial improvements if you’re thinking of selling soon unless you have to.
3. Calculate the total cost of improvements: Add the improvement expenses for all your capital improvement projects. This includes both the cost of materials and labor. Keep all of your receipts, contracts, and any documentation related to the improvements in case you need proof of the work.
4. Adjust your home’s cost basis: Add the total cost of all the capital improvements to the original cost basis of your home. This adjusted basis will be used when you sell your house to determine if you have a gain or loss.

So, Are Home Improvements Tax Deductible?

Yes, some home improvements are tax-deductible — but not all of them. Common tax-deductible home improvement projects include energy-efficient upgrades, medical modifications, disaster repairs, and home office expenses. Non-deductible projects typically include cosmetic changes, routine maintenance, modifications based on personal preferences, luxury enhancements, and non-energy efficient upgrades.

The most important tip we can give you regarding claiming home improvement tax breaks is to keep careful records. You don’t want to put tens of thousands of dollars into your home, assuming you’ll get it back as a reduced capital gains tax bill when you sell — only to find out that you lack the proper documentation to prove it to the IRS.

FAQs About Tax Deductible Home Improvements

In the following sections, we’ll include answers to some of the most common questions we get asked by homeowners about home improvements and related tax breaks.