Are Home Improvements Tax Deductible?

With all the upkeep a home usually requires, homeowners will likely wonder whether their home improvements are tax deductible. Home improvements are generally not tax deductible – but there are exceptions.

Your upgrade may be tax deductible if it meets the Internal Revenue Service (IRS) criteria for capital improvements. However, you won’t get the tax benefits until you sell the home. There are expectations for certain renovations. Homeowners can typically deduct improvements made for medical reasons, like making a home wheelchair accessible, while they still own the home.

IRS Requirements For Tax-Deductible Home Improvements

Homeowners can only deduct capital improvements from their taxes when they sell their homes. Capital improvements are permanent upgrades, adaptations or enhancements that improve the property and increase a home’s value. For a renovation to qualify as a capital improvement, the IRS says the improvement must meet one of the following conditions:

• The improvement adds substantial value to your home.
• The improvement prolongs the useful life of the property.
• The improvement is permanent.
• The improvement adapts the property to new uses.

According to the IRS, qualifying capital improvements aren't taxed directly but can affect the taxes you pay when you sell the property. This is why homeowners need to document improvements during a renovation or remodel and keep the receipts as proof.

The total cost of capital improvements gets added to the cost basis of the house, which is what you paid to purchase the property. When you sell, the higher cost basis due to capital improvements may reduce the capital gains tax you owe on the sale of the property, lowering your tax liability. While routine maintenance and repairs aren’t eligible for tax deductions, they may be part of a larger renovation project that increases the property's value, extends its useful life or adapts it to new uses.

IRS Requirements For Home Renovations Vs. Home Repairs

The IRS may distinguish between what counts as a renovation and what counts as a repair. Understanding this distinction can help you avoid any tax surprises when you sell your home. You can find a list of accepted capital improvements in IRS Publication 523.

Home Renovations

To qualify as a capital improvement under IRS guidelines, the renovation project must add value to your home, prolong its useful life or adapt it for new uses. Repair work may qualify if it’s part of the overall improvement. The cost of these improvements gets added to the basis of your property.

Here are some examples of renovations that may qualify as capital improvements, making them tax deductible when you sell:

• Entire room remodels
• Home additions
• System upgrades (heating and cooling systems, security systems, ductwork, etc.)
• Plumbing upgrades (septic system, water heater, filtration system, etc.)
• Upgrades to your home’s exterior (new roof, siding, storm windows, etc.)
• Landscaping improvements (lawn, grounds, etc.)
• Insulation addition or replacement
• Interior home improvements (wall-to-wall carpeting, new floors, kitchen modernization, built-in appliances, etc.)

However, there are some renovations the IRS doesn’t count as capital improvements, including improvements with a life expectancy of less than 1 year and improvements that are no longer part of the home, such as installing carpeting and ripping it out later.

Home Repairs

Repairs that are part of an extensive renovation that permanently adds value to a home or extends its lifespan may be tax deductible. But routine repairs or maintenance to keep your home in good condition generally aren’t tax deductible. Because you can’t add repairs that only maintain a home to your cost basis, they won’t reduce your tax liability.

Here are several home improvements that may not qualify for tax deductions because they count as home repairs:

• Replacing a broken windowpane
• Replacing kitchen cabinets
• Painting the interior or exterior of your home
• Fixing leaks
• Filling holes or cracks
• Replacing broken hardware

Additional Tax Benefits From Home Improvements

You may qualify for tax benefits when you improve your home office space, make medically necessary updates or improve your home’s energy efficiency. You may also be eligible for tax breaks on the maintenance of a rental property or the interest paid on a mortgage loan used to finance capital improvements. Unlike the capital improvements you can add to your cost basis when you sell, you can usually enjoy these deductions when you file taxes the year you incurred the expense.

1. Home Office Upgrades

If you have a space in your home you use exclusively and regularly for business, you can deduct certain expenses when filing your taxes. There are two basic requirements to claim this deduction: The home must be the principal place of business and have a dedicated space used exclusively and regularly for business. While renters may be able to deduct and rent, homeowners may be able to deduct mortgage interest, insurance, utilities, repairs, maintenance and depreciation by claiming the home office deduction.

2. Home Improvements For Medical Care

You may qualify for tax deductions if you modify your home for medical needs, like a ramp or handrails. If the primary purpose of the improvement is to provide medical care for you or someone else in the home, you may qualify for this deduction. The IRS defines covered medical expenses as those that help “alleviate or prevent a physical or mental disability or illness,” including insurance premiums, transportation to and from medical care and the cost of long-term care.

3. Energy-Efficient Improvements

The IRS provides tax credits for making your home more energy efficient. Homeowners may receive a credit equal to a percentage of the cost of the “qualified property” or energy-efficient equipment, including the cost of solar panels, energy-efficient water heaters, small wind turbines and geothermal heat pumps. Homeowners who made eligible energy-efficient improvements after January 1, 2023, may qualify for up to $3,200 in tax credits.

4. Rental Property Maintenance

If you rent out part of your property, you may be able to write off a portion of your adjusted cost basis each year it’s rented out through depreciation. Only improvements made to the parts you’re renting out may be depreciated in full. For improvements that benefit the entire home, you can only depreciate based on the percentage of the home that’s rented. Repairs may be tax deductible since they’re considered a necessary factor in the upkeep of a property.

5. Improvements Made Using A Mortgage

If you make a significant upgrade to your home using a mortgage loan – like a Federal Housing Administration (FHA) 203(k) loan, which includes the cost of renovations, or a second mortgage, like a home equity loan or home equity line of credit (HELOC) – you may be able to deduct the interest from your taxes. You may also be able to deduct interest on a cash-out refinance if you use the money to fund a home renovation that meets IRS guidelines.

How To Claim Your Home Improvement Tax Deduction

In most cases, you’ll enjoy the benefit when you sell your home because the cost of capital improvements gets added to the property’s cost basis. Document every improvement by keeping receipts, purchase orders, canceled checks and any other document that can prove your home’s tax basis to the IRS.

If you made improvements using funds from a mortgage loan or the tax benefit falls under the other exceptions we’ve discussed, you may qualify for a deduction on that year’s tax return. While itemizing your deductions can be useful, some taxpayers save more when they take the standard deduction. You should consult a tax professional if you have questions or need assistance.

The Bottom Line: You Can Deduct Certain Home Improvements On Your Taxes

If your home improvement meets IRS guidelines for capital improvements, you may qualify to deduct the improvement. Generally, homeowners don’t enjoy the capital improvement deduction until they sell their homes. Not all home improvements are tax deductible, but upgrades for a home office, medical care, energy efficiency or rental property maintenance may qualify for tax deductions. Again, you should consult a tax professional for advice on your projects or tax implications you’re unsure about.

Looking to finance your next project? A cash-out refinance can be a good way to fund home renovations or home repairs. Start an application for a cash-out refinance today to pay for your upcoming home improvement projects.