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Are Home Improvements Tax-Deductible?

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The cost of most home improvements are deductible from the federal taxes you owe on the profit you make selling your home. The benchmark of taxable profit from a home sale is high, however. If you lived in your home for at least two years, you typically need to make more than $250,000 to $500,000 in profit from selling it before you’re taxed on the proceeds.

The exceptions — improvement costs you could deduct from your federal taxes in the same tax year that you incur the costs — include changes made for your home-based business, energy-saving home improvements and improvements made for medical reasons.

Which home improvements are tax-deductible?

In the eyes of the IRS, an improvement could be anything that is a “capital improvement” — anything that increases the property value.

Here are some examples:

  • Adding on a new bedroom
  • Refinishing the basement
  • Building an in-ground swimming pool
  • Installing a fence
  • Constructing a garage
  • Installing a security system

When can you take the home improvement deductions?

Most home improvement costs are only deductible from the taxable profit you make on the sale of your home. To be taxed on your home’s sale, you typically:

  • Need to live in your home for less than two years and make a profit
  • Live in your house for more than two years and make more than $250,000 in profit from its sale if you file taxes as an individual
  • Live in your house for more than two years and make more than $500,000 in profit from its sale if you file taxes jointly

For example, if you sell your home at a $10,000 profit after living there for only a year, you’d be taxed. But imagine it cost you $3,000 to build a new back porch, which increased the home’s value and helped it sell. You can deduct that cost and only be taxed on a $7,000 profit.

Home improvements made for home business reasons, energy-saving purposes and medical accommodations can be deducted from federal taxes in the same tax year during which you expense them. You could claim them and reduce either your taxable business income or your federal income tax bill when you file your taxes as normal.

Improvements vs. repairs

In real estate, an improvement is anything that adds to the property’s value, adapts it to a new use or substantially prolongs its life. In contrast, repairs are fixes that keep your home up to date.

ImprovementsRepairs
  • Constructing a deck
  • Building an extension 
  • Installing a new roof
  • Putting in new wiring or plumbing
  • Paving a driveway
  • Re-staining a deck
  • Painting the house
  • Clearing the gutters
  • Fixing a leak
  • Patching a driveway

Energy credits

The federal government allows you to take deductions if you improve your home with energy-efficient materials or equipment. Note that there are limitations on how much you can deduct. For the 2021 tax year, there’s a lifetime limit of $500 for the residential energy property credit. Here’s the IRS Form 5695 for residential energy credit.

Deductible property costs Dollar limits
  • Solar electric
  • Solar water heating
  • Small wind energy
  • Geothermal heat pumps
  • Biomass fuel
  • Fuel cell
  • Certain insulation, including metal roofs, exterior doors and windows
  • $500 total lifetime residential energy property credit
  • $200 lifetime residential window deduction
  • $50 for any advanced main air circulating fan
  • $150 for any qualified natural gas, propane or oil furnace or hot water boiler
  • $300 for any item of energy-efficient building property

Medical home improvement deductions

If you need to make improvements to your home to suit your medical needs — whether you rent or own — you could deduct the cost from your federal tax bill. If you do so, you won’t be alone; taxpayers claim nearly $17,000 a year in medical expenses.

Examples of medical home improvements include:

  • Widening doorways to accommodate a wheelchair
  • Constructing entrance and exit ramps
  • Installing an accessible shower/bath

There are rules and limitations to these deductions, though. You may only deduct the amount of your total medical expenses that exceeds 7.5% of your adjusted gross income. You can use IRS Worksheet A to figure out how much you can deduct.

Home business deductions

If you use your physical home to earn money, any improvements made in the part of the home where you do business can qualify as federal tax deductions. Improvements made elsewhere in the home cannot. Here’s more on small business tax deductions.

Examples of home business improvements include:

  • New wiring for better lighting
  • New flooring to withstand foot traffic
  • Equipment for air circulation, such as a fan

If you rent out your home to long-term tenants or short-term guests, you may be able to deduct improvement expenses on a larger swath of your home, such as your kitchen, living and dining rooms, than you would if you only have a home office.

Other tax-deductible home costs

A home is the most expensive purchase that most consumers make. As such, it’s great when you can get something back on your taxes. Here are eight tax benefits of buying a home and a guide on deducting mortgage interest.

 

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