Can You Write Off Home Improvements on Your Taxes?

Many homeowners consider improvements to their property, often wondering if these expenses can be “written off” on their taxes. While most home improvements are not immediately deductible, they can significantly influence your tax situation. This guide explores how various home improvements affect your tax liability, from increasing your home’s value for future sale to qualifying for specific tax benefits.

Home Improvements and Your Home’s Tax Basis

When you purchase a home, its original cost establishes your “tax basis.” This basis is used to determine any taxable gain when you eventually sell the property. Certain expenditures on your home can increase this tax basis over time.

Capital improvements are additions or changes that add value to your home, prolong its useful life, or adapt it to new uses. These differ from repairs, which merely maintain the home’s current condition without significantly enhancing its value or extending its life. Examples include adding a room, replacing the roof, upgrading a central air conditioning system, or installing an extra water heater.

The cost of capital improvements is added to your home’s tax basis. This increased basis reduces the potential capital gain when you sell the home. For example, if you buy a home for $300,000 and invest $50,000 in improvements, your adjusted basis becomes $350,000. If you then sell the home for $500,000, your taxable gain is reduced from $200,000 to $150,000.

For a primary residence, homeowners may exclude a significant amount of capital gain from their income under Section 121 of the Internal Revenue Code. A single individual can exclude up to $250,000 of gain, while a married couple filing jointly can exclude up to $500,000. To qualify, you must have owned and used the home as your main residence for at least two of the five years before the sale. Tracking your basis through capital improvements remains important, especially if your gain might exceed these exclusion limits.

Qualifying Improvements for Tax Credits and Deductions

While most home improvements increase your home’s tax basis, certain types can lead to direct tax benefits. These opportunities are generally tied to specific purposes, such as medical necessity, energy efficiency, or business use.

Medically Necessary Home Improvements

Improvements made primarily for medical care can be deductible as medical expenses. These modifications must be for you, your spouse, or a dependent. Examples include constructing wheelchair ramps, widening doorways, installing grab bars, or modifying kitchen cabinets to accommodate a medical condition.

Only the amount of the expense exceeding any increase in the home’s value due to the improvement is deductible. For example, if a $21,000 hot tub installation increases your home’s value by $20,000, only $1,000 could potentially be treated as a medical expense. These expenses, along with all other medical expenses, are only deductible to the extent they exceed 7.5% of your Adjusted Gross Income (AGI) and only if you itemize deductions.

Residential Energy Credits

Homeowners can claim federal tax credits for installing certain energy-efficient improvements. The Energy Efficient Home Improvement Credit offers a credit of 30% of the cost for qualifying improvements. This credit has an annual limit of $1,200 for most improvements, with specific sub-limits such as $250 per exterior door (up to $500 total) and $600 for exterior windows and skylights. A separate annual limit of $2,000 applies to qualified heat pumps, heat pump water heaters, and biomass stoves or boilers. The maximum combined annual credit for these improvements is $3,200.

The Residential Clean Energy Credit provides a more substantial benefit for certain renewable energy installations. This credit is equal to 30% of the cost of qualified installations. Unlike the Energy Efficient Home Improvement Credit, this credit generally has no dollar limit, except for fuel cell property. Both credits are available through December 31, 2025.

Home Office Improvements

If you are self-employed and use a portion of your home exclusively and regularly as your principal place of business, certain home improvements can be deductible. This applies to improvements made directly to the home office space itself. For instance, if you add built-in bookshelves to a room used solely as your office, the full cost may be depreciated as a business expense.

For improvements that benefit the entire home, such as a new heating and air conditioning system, only a pro-rata share based on the percentage of your home used for business is deductible. The home office deduction can be calculated using either the regular method, which involves determining the actual expenses, or a simplified option, which allows a standard deduction of $5 per square foot up to 300 square feet. This deduction is not available for employees who work from home for an employer.

Improvements on Rental Property

Improvements made to a property used as a rental are handled differently for tax purposes. Unlike improvements to a personal residence, these are not immediately deductible. Instead, their cost is added to the property’s basis and then depreciated over a period of years.

Depreciation allows a portion of the improvement’s cost to be deducted each year, reflecting gradual wear and tear or obsolescence. For residential rental property, improvements are typically depreciated over 27.5 years. Capital improvements differ from repairs, which merely maintain the property and are generally deductible in the year incurred. Examples include renovating a kitchen or bathroom, replacing a roof, or installing central air conditioning.

Record Keeping for Home Improvements

Maintaining thorough records for all home improvements is important for tax purposes, even if an immediate tax benefit is not apparent. These records serve as documentation for future tax events, such as selling your home or claiming specific tax credits.

You should retain documents that prove the cost and nature of each improvement. This includes:

• Receipts
• Invoices
• Canceled checks
• Contracts
• Loan documents related to the project

Keeping these detailed records helps establish or adjust your home’s tax basis, which is important for calculating capital gains upon sale.

Proper organization of these records is also important. Consider keeping physical copies in a dedicated folder or digitally scanning and backing them up. This makes them readily accessible if needed to support claims for tax credits or deductions, or in the event of an IRS audit.

Records of home improvements should be kept for as long as you own the home, plus at least three years after you file the tax return for the year you sell it. In some situations, such as if you deferred gain on a previous home sale, you might need to keep records even longer. This ensures you have the necessary information to accurately report your tax situation.