“Not every home renovation can be written off on your taxes but there are some clever ways that home improvements can provide tax benefits. Alistair Berg/Getty Images
Bad news: You can’t write off home improvements.
But wait! There’s no need to turn off the computer in disgust and walk away just yet. Although the cost of regular, humdrum improvements isn’t deductible on your return, there really are some clever ways to recoup a few of your home costs by knowing the ins and outs of a tax return. From energy efficiency upgrades to improving the parts of your house you use as a home office, we might just find a deduction for the work you’ve put into your place.
Let’s start by looking at a prime example of finding an "improvement" deduction right smack in the middle of another write-off: your mortgage.
10: Use Your Mortgage
Where do home improvement budgets come from? Well, often they’re scraped together from savings — and possibly a loan or two. Neither of these is going to help you in the tax department. As we said, home improvements can’t be written off like, say, tax preparation fees or medical expenses (although later we’ll see how medical expenses might lead to home improvement deductions).
One way you can cleverly deduct your home improvement budget is to roll it into your mortgage when you purchase a house. This might not seem like the most genius plan; you’re still paying for the cost of repairs, after all, and getting a bigger mortgage to cover those repairs means you’ll be paying more in interest. But remember that if you itemize your deductions, you can write off the cost of your mortgage interest. Add the cost of improvements to your mortgage, and that write-off can increase.
Single and married people filing jointly can deduct home mortgage interest on the first $750,000 of debt, while married-but-filing-separately people can deduct interest on up to $375,000 apiece. Also note that you can deduct interest paid on a home equity loan if the money was used to build or "substantially improve" a home [sources: IRS].
9: Energy Efficiency Upgrades
While some of the tax benefits for energy efficiency improvements expired in 2013, there are a couple of ways to reduce your energy footprint while getting a bit of tax savings.
One is a tax credit for energy efficient systems in your home. It’s a one-time credit (meaning you can’t take it every year), but it lets you write off 30 percent of the cost of any solar, geothermal, wind or fuel cell technology you’re adding to your home (the fuel cell technology applies only to a primary home), as long it was up and running by the end of 2019. Even cooler is that the 30 percent applies to labor and installation as well as the product itself. After that, though, the credit goes down gradually, so that that improvements placed by in service in 2020 get 26 percent, and ones in 2021 get 22 percent. [sources: Perez, TurboTax.]
You can also take a nonbusiness energy property credit for installing home insulation, replacing exterior doors or replacing a furnace, among other items. The credit is 10 percent of the cost, with a maximum of $500 from 2006 to the present. There are a lot of other caveats as well, which you can find in this TurboTax article.
8: Make Improvements and Sell Your House
So this one’s a bit tricky to wrap your brain around, but stick with us: When you sell your house, you might be able to get some tax relief from improvements you made before the sale. Now on the surface, this seems exactly like what we told you was impossible: a tax break on a home improvement. But it’s a bit more circuitous than that.
When you sell your house, the term "tax basis" refers to the profit you make. And the idea is that any improvements you make to the house while you own it reduces the profit, which leaves you less money on which to be taxed. Note that if the home is your primary residence and you’ve lived there for more than a year, you only get taxed on the profit you make from selling a home if your gain is over $250,000 for a single person or $500,000 for a married couple filing jointly [source: IRS].
So, if John buys a home for $500,000 and make $50,000 in improvements, his tax basis is now $450,000. If he sells the home for $900,000, he’ll pay taxes on the profit of $350,000 — not $400,000. Bear in mind, he’d still be able subtract the $250,000 that won’t be taxed from this amount [sources: Anspach, Fishman].
7: Business-Related Depreciation
So, here’s a deduction for home improvements that, admittedly, is kind of a stretch on the use of the word "home." But since many people run a business on a property they own or rent, it seems like a good idea to point out some ways that you can deduct property improvements as a business expense.
Again, this applies to improvements you make to a property that you use for business. You don’t have to own the land or building; renting works too. But you do have to know the difference between a repair and an improvement, because the rules are a little different. If you make a repair, you can deduct the cost as a business expense — pretty simple. However, if you’re making an improvement, then it’s a bit more complicated. You have to depreciate the cost of the improvement over the course of its useful life [source: IRS 946]. So, you can deduct the cost of fixing the cracks in the parking lot, but if you replace the whole parking lot, you’ll probably have to depreciate the cost over the course of several years.
6: Home Office Improvement Deduction
Another home improvement that might deserve quotation marks around "home": any improvements you make to the home office. Much like the business expense deductions you can make for any improvements to the property you own or rent, the home office is considered a space where any improvements or repairs are subject to deductions.
But let’s be cautious. Remember that you can’t just claim any old space as your home office; you have to meet some strict requirements from the IRS (i.e., it can’t be a space the rest of the family uses recreationally). The improvements to a home office space are completely deductible, so long as 100 percent of that space is used exclusively as an office. Just remember that you’ll probably have to depreciate them as well, unless they’re repairs.
And here’s an extra bonus. Say you add an air conditioner or new water tank to the home. If you use 15 percent of your home for office space, you can depreciate 15 percent of the cost [source: Fishman].
More Tax Deductions for Home Improvements
5: Rental Home Repairs
Owning a second property you rent out isn’t that different, tax-wise, from owning a business. (That’s according to the IRS. You might point out that your real job would never require you to get up in the middle of the night to fix a toilet that backed up into the tub. Unless that really is your job, in which case you’re just a glutton for punishment.)
Much like a home office space, you can write off the cost of repairs to your rental property and then depreciate improvements. That’s pretty basic, and cool enough. But consider that if you rent out a portion of your own home, it works like the home office deduction. You can write off the cost of "your" home repair if it’s in the rental area, and you can write off improvements for the percentage of the space used for renting [source: Fishman]..
4: Casualty and Theft Losses
It’s not exactly the kind of home improvement you plan with paint chips or blueprints, but the fact remains that casualty, disaster or theft losses can be deducted on your tax return when appropriate. Nope, it’s not going to let you deduct the cost of the repairs or improvements, but getting a break on the damage or loss might be helpful when budgeting for restorations.
First, to qualify for claiming casualty losses from a natural disaster, the disaster needs to be a "federally declared disaster" by the President of the United States [source: IRS 515].
Second, keep in mind that you have to itemize your deductions to write off any losses; that means that you can’t take the standard deduction on your return. Remember as well that you pretty much need to take the loss in the year that the incident occurred — unless it’s specified by a federally declared mandate. Then you can claim it as a previous year loss. (That makes sense if the disaster occurs in January and you’re filing your taxes in April, for instance.) And don’t forget: You can’t deduct costs if you’re being reimbursed by insurance or some other benefit program [source: IRS 515].
3: Property Taxes
Although not directly related to renovations, it’s important for homeowners to remember that they can deduct their property taxes on their returns. Now, remember that property tax isn’t going to show up on your W-4; usually, folks include their property tax in mortgage payments, so only the bank or lender is handling the money. But if you itemize your deductions, it’s certainly worthwhile to add your property tax payments from the given year to your write-offs.
But what does this have to do with improvements? It is actually more of a tax warning than tip. Making substantial improvements to your home or property are going to raise that property tax assessment. Sure, you might get to write off a bigger amount, but you also might not be entirely thrilled to be paying the taxes in the first place.
2: Medical Reasons
For those folks who need to make home improvements or adjustments to accommodate a disability or medical condition, you’ll be pleased to know that the government offers a bit of tax relief for your project. If you need to make changes to your home to improve access or to alleviate exacerbating medical issues, you can absolutely deduct the costs on your tax return.
These "improvements" are considered medical expenses and are not to be mistaken for projects that increase the value of your home. If you need to modify doors to accommodate a wheelchair or create ramps to bypass steps, that’s great. If you add a fountain to the entryway because you find the sound of water decreases your anxiety, the IRS might come knocking.
Remember that because these are considered medical expenses, they’re only allowed if you itemize and exceed certain income limits. Also, if the medical-based improvement increases the property value of your home, you’ll need to subtract that amount from the cost of the improvement [source: IRS 502].
1: Moving Expense Deduction
Sometimes we find ourselves in the position of not just having to improve our homes, but also having to get rid of them entirely. Let’s call it the ultimate home improvement: buying a new one.
Before 2018, anyone who moved for a new job that was at least 50 miles (80 kilometers) away from their old place could deduct their moving expenses, including transportation, lodging, even storage and shipping. But everything changed with the Tax Cuts and Jobs Act of 2018, which got rid of the moving expense deduction for all but active duty members of the military. And even for the military, moving expenses are no longer an itemized deduction, but an "above the line" adjustment to taxable income [source: Perez].
All is not lost, though. If you incurred qualified moving expenses in 2017, you have three years from the date you filed your taxes to amend a return, or two years from the date you last paid taxes on that return [source: Perez]. Ask a tax expert if there’s still time to squeak out a deduction on that old move.
Originally Published: Dec 30, 2014
Lots More Information
Author’s Note: 10 Tax Deductions for Home Improvements
It’s kind of cool that we can say something like, "Home improvements don’t bring any deductions," and then turn around and find 10 ways that home improvements might reduce your tax liability. Credit the IRS for offering their myriad ways of making home ownership a not-so-terrible deal.
Related Articles
- How to Apply for a Homestead Exemption
- 5 Helpful First-time Homebuyer Programs
- How Itemized Deductions Work
- 10 Tax Tips for People Working and Living in Different States
Sources
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- Internal Revenue Service (IRS). "Publication 502." Feb, 11, 2020. (Feb. 24, 2020) http://www.irs.gov/publications/p502/ar02.html#en_US_2013_publink1000178902
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- Mengle, Rocky and McCormally, Kevin. "20 Most-Overlooked Tax Deductions." Kiplinger. Dec. 2, 2019. (Feb. 24, 2020) http://www.kiplinger.com/slideshow/taxes/T054-S001-the-most-overlooked-tax-deductions-slide-show/index.html
- Perez, William. "Are Moving Expenses Tax Deductible?" The Balance. Nov. 8, 2020 (Feb. 3, 2021) https://www.thebalance.com/moving-expenses-tax-deduction-3192992
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