How to Claim Home Improvements on Taxes

Making improvements to your home can be a significant investment, but some upgrades may also provide tax benefits. While not all renovations qualify for deductions or credits, certain improvements can reduce taxable income or increase your home’s value for tax purposes. Understanding what qualifies and how to document expenses properly is key to maximizing potential savings.

Criteria for Claiming Improvements

The IRS differentiates between improvements and repairs when determining tax eligibility. Improvements add value, extend the home’s lifespan, or adapt it for new uses, while repairs are routine maintenance and not deductible. For example, replacing a broken window is a repair, but installing energy-efficient windows is an improvement.

Most home improvements are not immediately deductible, but they can provide tax benefits over time. Some upgrades qualify for tax credits, such as energy-efficient installations, while others increase your home’s cost basis, reducing capital gains taxes when you sell. If the property is used for rental income or as a home office, certain improvements may be deductible in the year they are made.

Timing also affects tax eligibility. Medical-related improvements, such as installing a wheelchair ramp, may be deductible as medical expenses if they exceed 7.5% of adjusted gross income (AGI). Rental property improvements are typically depreciated over time rather than deducted all at once.

Types of Qualifying Upgrades

Certain home improvements may provide tax benefits through credits, deductions, or adjustments to your home’s cost basis. Eligibility depends on the purpose of the upgrade and IRS guidelines.

Energy-Efficient Installations

Upgrades that improve energy efficiency can qualify for tax credits under the Inflation Reduction Act of 2022. Homeowners can claim 30% of the cost of eligible improvements, with annual limits for specific upgrades. Energy-efficient windows and doors have a combined cap of $1,200 per year, while heat pumps, biomass stoves, and boilers have a $2,000 limit.

Solar panels, wind turbines, and geothermal heat pumps may qualify for the Residential Clean Energy Credit, covering 30% of installation costs with no annual cap. To claim these credits, the equipment must meet efficiency standards set by the Department of Energy. Homeowners should keep manufacturer certification statements and receipts as proof. These credits are nonrefundable, meaning they reduce tax liability but do not result in a refund if the credit exceeds taxes owed.

Structural Enhancements

Improvements that strengthen a home’s structure or extend its lifespan can impact tax calculations, particularly when selling the property. These upgrades increase the home’s cost basis, which is the original purchase price plus qualifying improvements. A higher cost basis reduces taxable capital gains when the home is sold.

Examples include roof replacements, foundation repairs, and room additions. If a homeowner buys a property for $300,000 and later spends $50,000 on a new roof and $30,000 on an extension, the adjusted cost basis becomes $380,000. If the home is sold for $500,000, the taxable gain is calculated as $500,000 minus $380,000, reducing the amount subject to capital gains tax.

These improvements do not provide immediate tax deductions but can be beneficial in the long term. Homeowners should maintain records of costs, including contractor invoices and permits, to support their adjusted cost basis when filing taxes after a sale.

Accessibility Additions

Modifications for medical needs may be deductible as medical expenses if they meet IRS requirements. To qualify, the cost must exceed 7.5% of the taxpayer’s AGI and be primarily for medical care rather than general home improvement.

Examples include installing wheelchair ramps, widening doorways, lowering countertops, and adding stairlifts. If a homeowner with an AGI of $100,000 spends $10,000 on a wheelchair ramp, only the portion exceeding $7,500—meaning $2,500—can be deducted as a medical expense. If the improvement increases the home’s value, only the portion that does not contribute to the home’s value can be deducted.

To substantiate the deduction, homeowners should obtain a doctor’s recommendation stating the medical necessity of the improvement. Appraisals before and after the modification can help determine whether the upgrade increased the home’s value, affecting the deductible amount.

Documentation and Recordkeeping

Maintaining thorough records is necessary to substantiate any tax benefits related to home improvements. The IRS may request proof of expenses, and without proper documentation, deductions or credits could be denied. Every receipt, invoice, and contract associated with an improvement should be stored securely, as tax authorities generally have up to three years to audit a return, though in cases of substantial underreporting, this period extends to six years.

Beyond receipts, homeowners should retain copies of permits and inspection reports. Many jurisdictions require permits for structural modifications, and having these on file helps with tax compliance and can be useful when selling the property. If an expense is challenged, a permit can serve as evidence that the improvement was legally completed and meets regulatory standards. Correspondence with contractors, including change orders and payment confirmations, can clarify project costs and prevent disputes over deductibility.

Bank statements and credit card records should align with claimed expenses to ensure consistency. Any discrepancies could trigger scrutiny, so payments should be made through traceable methods rather than cash. If an improvement is financed, loan agreements and amortization schedules should be kept to demonstrate how the project was paid for and whether any interest might be deductible in certain circumstances.

Photographic evidence can further support claims by documenting the condition of the property before and after the improvement. This is particularly useful in cases where an upgrade affects the home’s cost basis, as visual records can help establish the extent of modifications. Date-stamped images, along with contractor logs or work completion certificates, provide additional verification that an improvement was made in the tax year claimed.

Home Office Renovations

Upgrading a home office can yield tax benefits, but eligibility depends on how the space is used and whether the expenses qualify under IRS guidelines. The home office must be used exclusively and regularly for business purposes, meaning a multi-use area, such as a dining room doubling as a workspace, does not qualify.

Renovations that directly enhance the home office, such as built-in shelving, upgraded lighting, or soundproofing walls, can be deducted in proportion to the office’s square footage relative to the home. For instance, if a home office occupies 15% of a residence, then 15% of the cost of a qualifying renovation may be deductible. Improvements that benefit the entire home, such as replacing a central HVAC system, may qualify for partial deductions based on this percentage.

The method of deduction also depends on whether the taxpayer opts for the simplified home office deduction, which allows a flat $5 per square foot up to 300 square feet, or the actual expense method, which requires detailed tracking of costs. Choosing the right approach can significantly impact tax savings, particularly for larger renovations.

Adjusting Property Cost Basis

Home improvements can significantly impact the cost basis of a property, which is used to calculate capital gains tax when the home is sold. The cost basis includes the original purchase price plus qualifying improvements, reducing the taxable gain upon sale. Unlike repairs, which do not affect cost basis, renovations that add value or extend the home’s lifespan can be included.

For example, if a homeowner purchases a property for $250,000 and later spends $40,000 on a kitchen remodel and $20,000 on a new roof, the adjusted basis becomes $310,000. If the home is later sold for $450,000, the taxable gain is calculated as $450,000 minus $310,000, reducing the amount subject to capital gains tax. The IRS allows an exclusion of up to $250,000 for single filers and $500,000 for married couples filing jointly, provided they meet the ownership and residency requirements. Any gain exceeding these thresholds is subject to capital gains tax, which varies based on income level and holding period. Proper documentation of improvements is necessary to support any adjustments to cost basis during an audit.

Filing Methods

Claiming home improvements on taxes requires selecting the appropriate filing method based on the type of benefit being claimed. Taxpayers must determine whether an improvement qualifies for a deduction, credit, or cost basis adjustment and file the necessary forms accordingly. For energy-efficient upgrades, Form 5695 is used to claim residential energy credits, while home office deductions are reported on Form 8829 if using the actual expense method.

For those adjusting cost basis, there is no immediate tax filing requirement, but detailed records should be maintained until the property is sold. When reporting capital gains, Schedule D and Form 8949 are used to document the sale price, adjusted basis, and any applicable exclusions. If an improvement qualifies as a medical expense deduction, it is reported on Schedule A, subject to the AGI threshold. Consulting a tax professional can help ensure the correct forms are used and that all eligible deductions and credits are claimed.