Are Home Improvements Tax Deductible in 2025?

As homeowners enhance their living spaces, understanding the tax implications of home improvements is essential. Whether such expenditures are deductible on federal taxes in 2025 is a key consideration that can influence financial planning and decision-making.

Repairs vs. Improvements

Distinguishing between repairs and improvements is critical for understanding home improvement taxation. The IRS treats these categories differently, which impacts how they are reported and potentially deducted. Repairs, such as fixing a leaky faucet, are routine maintenance tasks that do not significantly add value or extend the property’s life and are generally not deductible for personal residences.

Improvements, on the other hand, enhance the property’s value, extend its life, or adapt it to new uses. Examples include adding a room or upgrading a kitchen. These expenditures increase the home’s basis, which is used to calculate capital gains when the property is sold. The IRS provides guidelines under Publication 523 for adjusting the basis for improvements.

In some cases, the line between repairs and improvements can blur. For example, replacing a broken window with an energy-efficient model may involve both repair and improvement elements. The IRS may require a detailed cost breakdown to determine the classification. Understanding these distinctions is important for homeowners looking to maximize tax benefits while complying with IRS rules.

Capital Improvements and Your Home’s Basis

Capital improvements adjust your home’s basis, which directly affects the capital gains tax when you sell the property. The basis is the original purchase price of the home, adjusted by adding the cost of improvements. For instance, if you bought a home for $300,000 and made $50,000 in improvements, your adjusted basis becomes $350,000, potentially reducing the taxable gain upon sale.

The IRS defines capital improvements as permanent structural changes or restorations that add value, extend the property’s life, or adapt it to new uses. Examples include installing a new roof or upgrading plumbing systems. Minor repairs, however, do not qualify. Keeping detailed records, including receipts and contracts, is essential to substantiate these improvements.

Medical Modifications

Medical modifications, which accommodate disabilities or medical conditions, may qualify for tax deductions under IRS Publication 502. To be deductible, a modification must primarily serve a medical purpose and not increase the property’s value.

Examples include installing wheelchair ramps or stair lifts. These costs can be included as unreimbursed medical expenses if they exceed 7.5% of adjusted gross income (AGI). Proper documentation, such as medical recommendations and invoices, is necessary to support these deductions.

Possible Credits for Energy-Efficient Upgrades

Energy-efficient upgrades can provide both environmental benefits and tax incentives. The federal government offers various tax credits to encourage energy-efficient home improvements, helping offset the costs.

Solar Installations

Solar energy systems are a popular way to reduce energy costs and carbon footprints. The federal Investment Tax Credit (ITC) allows homeowners to deduct a percentage of the cost of installing solar panels and related equipment. As of 2025, the ITC provides a 22% credit for residential solar installations. This credit is non-refundable, meaning it can reduce tax liability to zero but does not result in a refund. To claim the credit, taxpayers must file IRS Form 5695 and meet eligibility requirements, including professional installation.

High-Efficiency Windows

Replacing old windows with high-efficiency models can lower energy consumption. The Energy Efficient Home Improvement Credit, established under the Inflation Reduction Act of 2022, provides a tax credit for energy-efficient windows. Homeowners can claim up to 30% of the cost, with a maximum credit of $600. The windows must meet ENERGY STAR standards, and homeowners should retain documentation, including purchase receipts and the manufacturer’s certification.

Insulation and HVAC Systems

Improving insulation and upgrading HVAC systems can significantly enhance energy efficiency. The Energy Efficient Home Improvement Credit offers a 30% credit on qualifying materials, up to $1,200 annually. Eligible upgrades include insulation that meets IECC standards and high-efficiency HVAC systems meeting CEE highest tier requirements. Maintaining proper records, such as receipts and certifications, is essential for claiming this credit.

Tracking Documentation for Tax Records

Proper record-keeping is crucial for claiming tax benefits related to home improvements. The IRS requires substantiating documentation for deductions, credits, or basis adjustments. Without adequate proof, homeowners risk losing tax advantages or facing audit challenges.

Receipts and invoices should detail costs, including labor and materials. Contracts with contractors should outline the scope of work, and for energy-efficient upgrades, documentation should confirm compliance with specific standards like ENERGY STAR. Photographic evidence and permits can further support claims. Digitizing and backing up documents ensures they remain accessible.

Potential State or Local Incentives

State and local governments often provide additional incentives for home improvements, offering opportunities to offset costs further. These programs vary by location and may include rebates, tax credits, or property tax abatements.

Some states, like California, offer rebates for battery storage systems through programs like SGIP, while New York’s NY-Sun Initiative provides financial incentives for solar projects. Eligibility criteria often include income thresholds or the requirement for certified professional installation. Local governments may also reduce property taxes for improvements like renewable energy systems or accessibility modifications. Homeowners should consult local tax authorities or utility providers to explore available programs.

When Deductions May Not Apply

Not all home improvement expenses are deductible. For personal residences, deductions or credits generally apply only to specific categories, such as medical modifications or energy-efficient upgrades. Homeowners renting out part of their property face additional complexities. Improvements made solely to the rental portion may be deductible as business expenses, while those benefiting the entire property must be allocated proportionally. For instance, if a new HVAC system is installed in a duplex where one unit is rented, only the portion attributable to the rental unit can be deducted.

Additionally, costs that increase a home’s value but do not meet the IRS criteria for deductions or credits may only provide tax benefits when the property is sold by adjusting the home’s basis and reducing capital gains tax. Homeowners should carefully evaluate their projects to align them with tax planning goals.