Are Home Improvements Tax-Deductible?
Homeowners looking for ways to reduce their tax bill won’t be able to rely as much on home improvement deductions, in most cases. Home improvements are tax-deductible, but only if they serve a medical purpose for you or your family.
The good news is that home improvements may indirectly save you money at tax time — through other deductions and tax credits.
What is a tax deduction?
A tax deduction is used as a way to lower your bill each year at tax time. Each deduction you’re able to claim reduces your taxable income, which means you’ll owe Uncle Sam less when you file your taxes.
Some examples of available tax deductions for individual taxpayers include:
- Mortgage interest
- Student loan interest
- Home office expenses
- Moving expenses
- Charitable contributions
When are home improvements tax-deductible?
If you’ve made repairs or renovations to your primary home, you generally can’t claim home improvement deductions when it’s time to file your taxes. Home improvements and repairs are often considered nondeductible personal expenses.
There are some exceptions to this rule, however, which we’ll explain below.
Medical-related improvements made to your home may be eligible to reduce your taxable income through the medical expense deduction. These “capital expenses,” which might include improvements or equipment installations, must serve the purpose of providing medical care for you, your spouse or your dependent(s), according to the IRS.
If the permanent improvements add to your home’s value, the cost can be partially included as a medical expense. If they don’t increase your home’s value — such as improvements to make your home more accessible for people with disabilities — the full cost is considered a medical expense.
Medical home improvements that may qualify as fully deductible include:
Any home repairs or renovations made solely for aesthetic or architectural reasons won’t qualify for the medical expense deduction — or any other deduction, for that matter.
They do, however, increase your tax basis, or the amount of money you’ve invested in your home. This matters when selling your home, because the basis reduces how much you may owe in taxes on your home sale profits (more on this later).
Improvements that fall into this category might include:
How home equity loans and HELOCs affect tax deductions
You may not be able to snag a home improvement tax write-off on your next tax return directly, but there’s an upside if you borrowed against your home equity to fund those improvements.
Under the Tax Cuts and Jobs Act (TCJA) of 2017, homeowners who take out a home equity loan or home equity line of credit (HELOC) can deduct the mortgage interest they pay if the money withdrawn is used to buy, build or substantially improve the home securing the loan or credit line. This deduction applies to both primary residences and second homes. If the funds are used for any other purpose, such as consolidating debt or covering college costs, they won’t qualify for the deduction.
The TCJA allows single and married taxpayers to deduct the interest paid on up to $750,000 ($375,000 if married filing separately) in mortgage debt, including first mortgages, home equity loans and HELOCs. Keep in mind that you’ll need to itemize your deductions — rather than taking the standard deduction — in order to deduct your interest payments.
Other tax benefits for homeowners
Homeownership has a handful of other tax benefits. Here are a few that should be on your radar:
- Home office deduction. If you use a portion of your home to work remotely or operate a business you own, you may qualify for the home office deduction. This benefit applies to both homeowners and renters.
- SALT deduction. You can deduct up to $10,000 in state and local taxes — including property taxes — from your taxable income. The limit is $5,000 for married couples filing separate tax returns.
- Energy-efficiency credit. Home improvements to make your home energy-efficient may qualify for the residential energy-efficient property credit, which reduces the amount you owe in taxes. Eligible upgrades include solar panels, solar water heaters and small wind turbines.
- Tax-free sales proceeds. When you sell your home, you can deduct the cost of capital improvements made before the sale from the profit you make on the sale. Subtracting the costs of home improvements from your sales proceeds means you’ll pay fewer taxes — and, in many cases, no taxes — on those gains. Single taxpayers won’t have to pay taxes on up to $250,000 in profits; the amount increases to $500,000 for married couples filing jointly.