Home improvements can make your home more comfortable, raise its value and lower energy costs over time. Some projects may also qualify for tax credits or deductions. These tax breaks can reduce what you owe when you file your taxes. In other cases, the cost of improvements can increase your home’s cost basis. That may lower capital gains taxes if you sell the home later.
A financial advisor can help review how renovation costs, tax benefits and home value fit into your broader financial plan.
What Tax Benefits Are Available for Home Improvements?
Tax benefits for home improvements generally fall into two categories: tax credits and tax deductions. While both can reduce your overall tax burden, they work differently and apply to specific types of improvements.
Tax credits reduce your tax liability directly on a dollar-for-dollar basis. For example, if you qualify for a $1,000 tax credit, the IRS reduces your federal tax bill by $1,000. Credits are often tied to energy efficiency or renewable energy improvements.
Tax deductions, on the other hand, reduce your taxable income rather than your tax bill directly. Some improvements may also increase your home’s cost basis, which can reduce capital gains taxes when you sell the property.
Not all home improvements qualify for immediate tax savings. Cosmetic upgrades or routine maintenance typically do not provide direct tax benefits for home improvements, though they may still affect long-term tax outcomes through cost basis adjustments.
How Home Improvements Increase Your Home’s Cost Basis
Even when home improvements do not qualify for immediate credits or deductions, they can still provide tax benefits for home improvements by increasing your home’s cost basis. Cost basis is the original purchase price of your home, adjusted for qualifying improvements.
Major improvements that increase cost basis include:
- Installing a new roof
- Completing a kitchen remodel
- Adding new rooms or expanding living space
- Building decks or structural additions
A higher cost basis reduces your capital gains when you sell your home. This means you may owe less tax on any profit from the sale.
For example, if you bought your home for $300,000 and made $50,000 in qualifying improvements, your adjusted cost basis becomes $350,000. If you later sell the home for $500,000, the IRS reduces your taxable gain accordingly.
Tax Benefits for Medically Necessary Home Improvements
Certain medically necessary home modifications may qualify as deductible medical expenses under IRS rules. These tax benefits for home improvements apply when the primary purpose of the modification is to treat or accommodate a medical condition or disability, rather than improve convenience or aesthetics. The improvement must directly support medical care or accessibility needs.
Examples of qualifying medically necessary home improvements include:
- Installing wheelchair ramps
- Widening doorways to accommodate mobility devices
- Lowering cabinets or countertops for accessibility
- Modifying bathrooms with accessible showers, grab bars or other safety features
- Adding lifts, stair glides, or other accessibility equipment
If the improvement increases your home’s overall value, only the portion of the cost that exceeds the increase in value may be deductible.
For example, if a medically necessary improvement costs $15,000, but increases your home’s value by $5,000, only the remaining $10,000 may qualify as a medical expense deduction. If the improvement does not increase the home’s value, the full cost may be deductible.
The IRS treats medical home improvement expenses as itemized medical deductions and are generally deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI). This means smaller expenses may not produce a tax benefit unless combined with other qualifying medical costs.
To claim these tax benefits for home improvements, proper documentation is required. This typically includes a written recommendation from a licensed medical professional and detailed records of installation costs, invoices, and related expenses. Maintaining thorough documentation helps support the medical necessity and deduction eligibility if requested by the IRS.
Tax Benefits for Home Improvements on Rental Properties
Rental property tax deductions may include additional tax benefits for home improvements. Improvements made to rental properties can often be depreciated over time.
Repairs and improvements are treated differently. Repairs maintain existing conditions and are often deductible immediately. Improvements that increase property value or extend useful life must be depreciated over multiple years.
Depreciation allows property owners to deduct a portion of improvement costs annually. This reduces taxable rental income and lowers overall tax liability.
These tax benefits for home improvements can significantly improve the financial performance of rental property investments.
Home Improvements That Do Not Qualify for Immediate Tax Credits or Deductions
Many home improvements do not provide immediate tax benefits. Cosmetic upgrades and general maintenance typically do not qualify for credits or deductions.
Examples include:
- Painting walls
- Installing new flooring
- Landscaping or aesthetic upgrades
- Routine maintenance and repairs
Although these improvements do not offer immediate tax benefits for home improvements, they may still increase your home’s cost basis. This can help reduce capital gains taxes when you sell the home.
Bottom Line
Tax benefits for home improvements can come in several forms, including tax credits, medical deductions and depreciation for rental properties. Some improvements may also reduce taxes later by increasing your home’s cost basis. Not every upgrade provides an immediate tax break. However, projects such as energy-efficient upgrades, accessibility improvements or major structural work may qualify for certain tax benefits. Even when a project does not qualify for a credit or deduction, it may still reduce capital gains taxes if the home is sold later.
Tax Planning Tips
- A financial advisor can help review how renovation costs, available tax benefits and potential cost basis adjustments may affect your overall tax planning and long-term financial strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
Photo credit: ©iStock.com/CHOLTICHA KRANJUMNONG, ©iStock.com/pcess609, ©iStock.com/designer491
Read the full article here
