If you’re thinking of doing a home improvement project, then you’re probably also running the numbers and wondering: are these home improvements tax deductible? After all, if you’re going to invest in a project, you want to be sure it pays—whether by increasing your home’s value or decreasing your tax bill!
So are home improvements tax deductible? The short answer is no, not most of the time. But hang on—you can still save on taxes if you know how the rules work. Ready to uncover a few tax benefits? Ask yourself four questions:
#1. Is part of your home used for business?
If so, then some home improvements may be tax deductible. Let’s say you have a home office or you rent a portion of your property out. In that case, you can deduct any repairs and improvements you make to that space as a business expense. In addition, if you make improvements to the whole house—like installing new air conditioning or upgrading the wiring—you can depreciate a portion of those expenses over time. For example, if 10% of your home is designated as your office space, then you can depreciate 10% of the cost of installing a new air conditioning system throughout.
#2. Will you use a home improvement loan to pay for your project?
While home improvements aren’t usually tax deductible, you can still deduct the interest you pay on certain home improvement loans. For example, if you use a secured loan like a home equity loan or a home equity line of credit, the interest you pay is tax deductible. The same tax rules apply to your mortgage payment, which is why some homeowners will roll the price of anticipated home improvements into their mortgage.
#3. Are you making energy efficient home improvements?
The Residential Renewable Energy Tax Credit can help you shave 30% off the cost of your updated energy system, whether you’re installing solar, wind, geothermal, or fuel cell technology. This is a one-time credit that you can use to pay for both the new system and the labor and installation costs involved.
#4. Would you like a tax break when you sell your home?
The home improvements you make now can help lower your tax bill in the future. Here’s how it works: because home improvements increase your tax basis, they decrease the amount of capital gains tax you will owe later. Let’s say you buy a home for $300,000 and make $30,000 worth of home improvements over the years. This increases your tax basis, or the amount you’ve invested in your home, to $330,000. Later, you sell your home for $700,000. You would subtract the tax basis ($330,000) from the sales price ($700,000) to determine your profit ($370,000), which is taxable.
But let’s say you’re a single filer eligible for the $250,000 tax exemption: that’s $370,000 minus $250,000, which means you’ll be taxed on just $120,000. That’s because homeowners don’t pay a capital gains tax if their profit is less than $250,000 (for single filers) or $500,000 (for joint filers). However, if you’re expecting high returns, home improvements can alleviate your tax burden.
Just a few important points to keep in mind: the IRS only counts home improvements that increase your home’s value or useful life, or adapt it to new purposes. These capital improvements include things like installing a new roof, upgrading the wiring, or adding a fence—and they must still be present when you sell your home! For example, if you installed new wood siding but later replaced it with brick, you can’t count the cost of the wood siding as part of your tax basis. Also, repairs that simply maintain your home’s condition, like refinishing the deck, don’t count.
Disclaimer: The HOVER Blog is for informational purposes only and is not intended to provide or be relied on for tax, legal, or accounting advice. Consult a tax adviser to determine how the tax laws would apply to your circumstances before engaging in any transaction.
