Can I Write Off Home Improvements on Taxes?

Home improvements can enhance a property’s value and comfort. While directly “writing off” improvements for a personal residence is generally not possible as an immediate deduction, these expenses can offer valuable tax advantages under specific circumstances. The tax treatment depends on the improvement’s nature and purpose.

Understanding Tax Treatment of Home Improvements

The Internal Revenue Service (IRS) distinguishes between “repairs” and “improvements” for tax purposes. Repairs maintain a property’s current condition and are generally not deductible for a personal residence, like routine maintenance. Improvements add value, prolong the property’s useful life, or adapt it for new uses. Qualifying home improvements are not immediately deductible but add to the “cost basis” of the home.

The cost basis is the original purchase price of the home plus the cost of certain additions and improvements. Increasing your home’s cost basis does not provide an immediate tax deduction. Instead, it reduces the taxable capital gain when you sell the home. A higher cost basis means a smaller difference between the sale price and the adjusted basis, lowering potential capital gains tax.

While the focus for a personal residence is on basis adjustment, rules differ for other property types. These specific scenarios, such as improvements to rental properties or a dedicated home office used for business purposes, have different tax treatments, allowing for potential deductions or depreciation.

Qualifying Home Improvements for Tax Benefits

Home improvements can lead to tax benefits in several specific situations. These benefits often depend on the improvement’s nature and how the property is used.

When selling a primary residence, the increased cost basis from capital improvements can reduce potential capital gains. The IRS offers a Section 121 exclusion, allowing single filers to exclude up to $250,000 of gain and married couples filing jointly up to $500,000 from taxable income. Taxpayers must have owned and used the home as their main residence for at least two of the five years leading up to the sale. If the gain exceeds this exclusion, the increased basis helps lower the taxable portion.

Medically necessary home improvements can be partially deductible as medical expenses. Examples include installing entrance ramps, widening doorways, or modifying bathrooms with grab bars. To qualify, these expenses must be primarily for the medical care of the taxpayer, spouse, or a dependent. Only the amount exceeding the increase in the home’s value can be included as a medical expense. These expenses are deductible only to the extent they exceed 7.5% of your Adjusted Gross Income (AGI).

Energy-efficient home improvements may qualify for residential energy tax credits. These credits directly reduce your tax liability, unlike deductions which reduce taxable income. For improvements installed after January 1, 2023, the Energy Efficient Home Improvement Credit equals 30% of qualified expenses, with an annual limit of $1,200 for most improvements and up to $2,000 for qualified heat pumps, heat pump water heaters, and biomass stoves/boilers. The Residential Clean Energy Credit, for items like solar panels, wind energy, or geothermal heat pumps, offers a 30% credit with no annual or lifetime limit through 2032.

For self-employed individuals, improvements related to a qualifying home office can be deductible as business expenses. A portion of expenses like mortgage interest, property taxes, utilities, and depreciation can be claimed if the space is used exclusively and regularly for business, and it is either the principal place of business or a place to meet clients. The IRS offers a simplified option allowing a deduction of $5 per square foot, up to a maximum of 300 square feet ($1,500).

Improvements to rental properties are not immediately deductible but are depreciated over time. Instead of deducting the full cost in one year, the expense is spread out over the asset’s useful life. For residential rental properties, the depreciation period is 27.5 years. This allows property owners to recover the improvement cost gradually, reducing their taxable rental income.

Documentation and Record Keeping

Record-keeping is essential for any homeowner seeking tax benefits from home improvements. Documentation provides evidence to substantiate claims, whether for adjusting your home’s cost basis, claiming medical expense deductions, or applying for energy credits. Without proper records, the IRS may disallow claimed benefits during an audit.

Essential documents to retain include receipts and invoices for materials and services. Canceled checks or bank statements proving payment are important. Any contracts with contractors or service providers should be kept, detailing the scope of work and costs.

Photographs of the property before and after improvements can serve as visual evidence. Also keep a detailed log or spreadsheet. This record should include the date, cost, description of work, and purpose of the improvement (e.g., to increase value, for medical necessity, or for energy efficiency). These records are important for calculating capital gains accurately when the home is sold. They also support eligibility for tax credits or deductions and are important during an IRS inquiry.

Reporting Home Improvements on Your Tax Return

The way home improvements are reported on a tax return depends on the type of benefit claimed. Taxpayers must understand where to input this information to realize tax savings.

For capital improvements that increase your home’s cost basis, this information is not reported annually. Instead, it becomes relevant when you sell your primary residence. The adjusted cost basis is used to calculate the capital gain or loss, reported on Schedule D (Capital Gains and Losses) of Form 1040. This calculation helps determine how much profit, if any, is subject to capital gains tax after considering the Section 121 exclusion.

Medically necessary home improvements are reported as an itemized deduction. These expenses are included in medical and dental expenses on Schedule A (Form 1040, Itemized Deductions). Taxpayers can only deduct the portion exceeding the Adjusted Gross Income (AGI) threshold, and only if they choose to itemize deductions rather than take the standard deduction.

Energy-efficient home improvements that qualify for tax credits are claimed on Form 5695 (Residential Energy Credits). This form calculates the credit based on qualifying expenses and limits, and the credit directly reduces your tax liability.

Improvements related to a home office for self-employed individuals are reported on Schedule C (Form 1040, Profit or Loss from Business). These expenses are included as business expenses for the home office, reducing the business’s taxable income.

For improvements made to rental properties, the cost is not deducted immediately but is depreciated over its useful life. This depreciation is reported on Schedule E (Form 1040, Supplemental Income and Loss). The depreciation expense reduces the taxable income from the rental property.