When you own a home, something always needs maintenance or repair. Typical home improvements include lawn and garden upgrades, painting your home, upgrading doors and windows, adding a closet system, and replacing old appliances with newer, more energy-efficient versions.
As you can imagine, home improvements can add up to the point where you may need a home improvement loan just to cover the expense. It’s important to know which home improvements are tax-deductible so you can get some of your investment back when you eventually sell your home.
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What Are Home Improvement Deductions?
Home improvement deductions are amounts of money that you may subtract from your taxable income on your tax return. These deductions account for the money you’ve spent on home modifications that are eligible for a tax break. Tax deductions lower your tax liability and could help you save on your tax bill. If you have enough deductions, you may even get a tax refund, so taking the time to know what types of deductions you may legally take could save you considerable money.
Not every household project you spent money on to fix or upgrade your primary residence counts as a tax deduction. There’s an important distinction between a home improvement and a home repair. You need to know the difference because any home improvements you make are tax-deductible, and home repairs are not.
A home improvement upgrades and adds value to your home. A home repair fixes something that’s broken or not working so your home can continue to function in the same way it always has. Home repairs include:
- Fixing a broken garage door mechanism;
- Repairing broken windows;
- Fixing a water heater or furnace;
- Replacing a faulty part on your washing machine.
The home repairs above are necessary to prevent more significant problems such as a burglary, flood, or fire, but they’re not tax-deductible.
What Home Improvements Are Tax-Deductible?
Now that you know that the main difference between a home repair and a home improvement is that a home improvement adds value to your home, you can strategically plan how you spend money on your home to maximize your future tax benefit.
If you have a necessary repair to make, you may not be able to deduct it from your taxes, but there’s a workaround. It may be a wise idea to replace instead of fix an item to classify it as a home improvement. Using the non-deductible repair examples above, consider the following:
- Broken garage door opener: Instead of fixing the existing garage door opener, price out the cost of replacing the entire garage door system. The price may be higher, but perhaps not by much when you weigh the benefits. You could improve your home’s curb appeal and increase your property value. The difference in price may be offset by the tax savings when you deduct it as a home improvement.
- Repairing broken windows: Depending on the age and quality of the broken windows, replacing your windows becomes a tax-deductible home improvement. Again, you could increase your property’s value, add to your home’s appearance for a quicker sale, and improve your home’s energy efficiency, saving you money on your utility bills in the long run.
- Fixing a water heater or furnace: Sometimes it’s smarter to replace an old furnace or water heater with a modern, Energy Star rated one. Many states provide rebates for the upgrade. Newer water heaters or furnaces could dramatically reduce your utility expenses, and the purchase and installation of a new system can be deducted from your profits when you sell your home, lowering your tax liability.
- Replacing a faulty part on your washing machine: Similar to the water heater or furnace scenario, replacing instead of repairing your washing machine may be a smarter financial decision. Washing machines and other appliances start failing over time. The repair you make today may not last. On the other hand, a new washing machine could function trouble-free for over ten years and will be more energy-efficient.
Other examples of tax-deductible home improvements include:
- A kitchen or bath remodel;
- Adding a new patio deck;
- Creating an outdoor kitchen;
- Adding solar power to your home;
- Landscaping your yard;
- Replacing your garden’s irrigation system.
Most of the home improvements you make today will come back to you in tax savings when you sell your home. But you can take tax credits for special home improvements that are energy-related such as a solar power system, wind turbine, or geothermal heat pump for the year you installed them.
How Much Can I Deduct for Home Improvements?
You can deduct the full amount of your home improvements, as long as you save all the receipts and documentation. The most important thing to remember about your home improvement tax deduction is when you’re allowed to take the deduction. You won’t get the tax benefit the year you make the investment, but when you sell your home instead.
How to Deduct Home Improvements
To know how to deduct your home improvements, you’ll need to familiarize yourself with some tax-related terms. Home improvements are called capital improvements by the IRS. Capital improvement expenses raise your home’s tax or cost basis. The higher the tax basis, the lower your profit will be, which is a good thing. When you sell your home, you will owe taxes on your profit. The smaller the profit, the less in taxes you will owe.
You’ll need to save your receipts and keep a tally of your capital improvements, large and small, for when you sell your home. All the capital improvements come back to you in tax savings.
It’s worth consulting with an accountant or tax professional about your home’s tax liability. You may not need to deduct your home improvements, depending on how much your home’s value increases between the time you bought it and sold it. That’s because the IRS allows you to exclude a sizable $250,000 of your home’s profit if you file as single or $500,000 if you file jointly with your spouse.
Home Improvements Tax Deduction Form
The IRS has a helpful worksheet on page 13 of Publication 530, so you can keep track of your capital expenditures. Once you sell your home, you can report your sale and associated expenses on the 1040’s Schedule D.
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