Can You Write Off Home Improvements on Your Taxes?

Home improvements are generally not immediately tax-deductible. However, these investments can offer valuable tax benefits under specific circumstances or at a later time, particularly when reducing potential tax liabilities.

General Tax Treatment of Home Improvements

Most home improvements to a primary residence are not tax-deductible in the year they occur. Homeowners cannot claim a deduction for costs like a new kitchen, bathroom renovation, or room addition on their annual tax return.

The IRS distinguishes between “capital improvements” and “repairs” for tax purposes. Capital improvements add value, prolong useful life, or adapt a home to new uses. These substantial changes, like adding a room or remodeling a kitchen, are not immediately deductible. Their cost is added to the home’s “cost basis,” which includes the original purchase price and certain closing costs.

Repairs maintain the home without significantly increasing value or extending useful life, such as fixing a leaky faucet or repainting. For a primary residence, neither capital improvements nor repairs are deductible. However, this distinction is important for rental properties, where repairs may be immediately deductible.

When the home is sold, a higher cost basis reduces potential capital gain, the profit from the sale. This lowers tax liability, making tracking capital improvements beneficial.

Improvements Yielding Specific Tax Benefits

While most home improvements aren’t directly deductible, specific scenarios offer tax benefits. These can be deductions, credits, or adjustments to the home’s cost basis.

Medical Home Improvements

Improvements for medical care, for the homeowner, spouse, or a dependent, can be medical expense deductions. Examples include entrance ramps or widened doorways. These expenses are subject to the Adjusted Gross Income (AGI) threshold; only the amount exceeding 7.5% of your AGI can be deducted. The improvement must be medically necessary and not primarily for aesthetic purposes to qualify.

Energy-Efficient Home Improvements

Energy-efficient home improvements often qualify for tax credits, which directly reduce tax owed. Qualifying improvements include solar panels, energy-efficient windows, doors, insulation, and high-efficiency HVAC systems. These credits are generally claimed on Form 5695, Residential Energy Credits.

Home Office Improvements

Improvements to a home portion used exclusively and regularly as a home office for business can be deductible. This applies if the home office is the principal place of business or where a taxpayer meets clients. The deduction requires the space to be used solely for business, making shared areas ineligible.

Rental Property Improvements

Improvements to a rental property are not immediately deductible but are depreciated over time, typically 27.5 years for residential properties. This differs from repairs, which are usually deductible in the year incurred. For example, replacing a roof is depreciated, while patching a leak is a deductible repair.

Improvements When Selling Your Home

Capital improvements add to the home’s cost basis. This increased basis reduces taxable capital gain when selling the home. For instance, if a home purchased for $300,000 has $50,000 in capital improvements, the adjusted cost basis becomes $350,000. If the home sells for $750,000, the capital gain is calculated on $400,000 ($750,000 sale price – $350,000 adjusted basis), rather than $450,000 ($750,000 sale price – $300,000 original basis). This increased basis works with the home sale gain exclusion, allowing single filers to exclude up to $250,000 and married couples filing jointly up to $500,000 of capital gain from a primary residence sale, provided ownership and use tests are met.

Documentation and Record Keeping

Maintaining records for all home improvements is important, regardless of immediate tax benefit. These records substantiate claims for deductions, credits, or cost basis adjustments. The IRS requires documentation to support claimed income, deductions, and credits.

Retain receipts, invoices, checks, or credit card statements detailing material and labor costs. Keep contracts, work dates, and before-and-after photographs. These records provide an audit trail and verify completed work.

Keep these records as long as you own the home and for at least three years after selling it. This supports the adjusted cost basis calculation during an audit related to the home sale. Proper record keeping ensures you utilize available tax benefits and avoid issues with tax authorities.