There are tax implications of making home improvements, but only in specific situations. When it comes to your taxes, a home improvement might include any work done that increases the value of your home substantially, improves the useful life of the property, or creates new uses.
We’ll get more into what that means specifically below.
Home Improvements vs. Repairs
First, the money you spend on your home in terms of taxes can be divided into improvements and repairs.
The cost of capital improvements can be added to your tax basis in your house. Tax basis is what’s subtracted from the sales price to figure out how much your profit is. With that in mind, you can only take advantage of this if you’re selling your home.
A capital improvement in this context is what was mentioned above—anything that adds value, adapts a home to new uses, or prolongs its life. Something that you could include as a capital improvement might be a new roof or central air-conditioning.
Capital improvements don’t have to be big purchases either—something like storm windows counts or a home security system.
Repairs can’t be added to your basis. Repairs might include painting your home or fixing your gutters.
If you make improvements to your home, make sure you keep records of everything so you’ll have them if you do sell.
Tax Deductions for a Home Office
One way you could save on your taxes and improve your home at the same time is to build a home office. You get a small deduction on improvements you make to your home if you’re using one of the rooms exclusively as your work area, which many people are doing now.
Any repairs benefiting your home can also be deducted, based on the percentage amount of your home used as an office.
Similarly, if you rent out a part of your home, you might be able to deduct what you make in improvements to that area. If you were to, just to give you an example, add a bathroom to the area of your home you rent, you might be able to write that off in its entirety.
If a health care provider suggests modifications to your home to help you or to allow you to provide care for your family member, such as an aging parent, the expenses of these updates may be deductible. Examples include adding a wheelchair ramp or modifying your doorways. If the improvement adds value to your home, on the other hand, it’s not deductible.
Upgraded Energy Systems
The IRS has residential energy-efficient property credits. Qualifying properties according to their guidelines updated in April 2021 include solar electric, solar water heaters, fuel cell property and small wind turbines. Also included are geothermal heat pumps.
Improvements qualifying for a residential energy property credit include adding energy-efficient exterior windows and doors and skylights and roofs that are metal or asphalt. Insulation updates are included, and so are upgrades to heating and air systems to make them energy-efficient.
There are some ways to save on your taxes by upgrading your home, but limitations also exist. If you’re unsure of anything, it’s best to talk to a tax professional because guidelines can change from year to year.