Are Home Improvements a Tax Deduction?

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Are Home Improvements Tax Deductible?

Are home improvements a tax deduction?

Whenever you make a home improvement, such as replacing the windows or installing a brand-new HVAC system, you may be able to use those investments to claim a home improvement tax deduction.

This tax deduction cannot be used when you spend the money, but it can reduce your taxes in the year you decide to sell your house.

Despite this being an incredibly easy way of reducing your capital gains taxes, so many taxpayers fail to keep accurate records, and many are simply unaware that they can claim a home improvement tax deduction when they sell their home.

The Difference Between Improvements and Repairs

There is a difference between the cost of improvements and the cost of repairs for tax purposes. It is important to know the difference between the two to avoid making any mistakes when it comes to reducing your exposure to capital gains taxes.

Capital Home Improvements Qualify

Capital Home Improvements

All capital improvements may be added to the tax basis of a property. Your tax basis is the amount you paid for the home plus any improvements. This is subtracted from the final sales price, with the remaining amount being subject to capital gains taxes.

The definition of a capital improvement is something that increases the home's value, extends its lifespan, or adapts it to a new use.

There is no comprehensive list of what counts as a capital improvement, but common improvements like a new roof, a new HVAC system, an extension, or a swimming pool will always qualify.

Capital improvements do not have to be expensive. Other types of capital improvements include storm windows, an additional water heater, an intercom, and home security systems.

What About Energy Saving Home Improvements?

Energy saving home improvements

You should also know home improvements designed to save energy may yield tax credits in the year you make them. In addition, federal and state governments have a variety of programs aimed at encouraging people to make energy-saving home improvements through one-time tax credits.

What about Home Repairs?

The cost of any repairs cannot be added to your tax basis. For example, you will be unable to add a repaired windowpane, painting a room, or fixing a gutter onto your tax basis. These are necessary acts of maintenance.

Tracking is Less Critical than Before

In the past, homeowners had to keep every receipt for a home improvement to qualify. Every single cent was added to the basis to reduce capital gains taxes. However, the situation has changed, and most owners will find that profits on sales of their homes are mainly tax-free anyway.

Either way, it is still good practice to keep the receipts because for high-income taxpayers and real estate investors, adding home improvements can significantly impact the tax basis.

Saving on Capital Gains When You Sell

home improvement deduction selling home

If you have lived in a home for two of the past five years before the sale, the first $250,000 of profit is tax-free if you are a single taxpayer. For married couples filing jointly, the tax-free profit amount is $500,000.

To determine the size of the profit, your goal should be to increase the basis as much as possible. First, calculate everything involved in the purchase of the house. This includes the purchase price and any additional fees involved in buying the home.

Add in the total cost of every improvement you have made over the years. This is known as the adjusted basis of a home.

Compare the difference between the adjusted basis and the property's sale price. That number is what you will pay capital gains taxes on.

Be aware that your exposure only begins after your exemption, as described above.

Taxpayers should also be aware that losses on sales of personal residences are not tax-deductible.

How to Stay Prepared

Keeping track of all your home improvements can be challenging, especially if you have owned your home for a significant period.

Make a special folder designed for the receipts and records relevant to your property. For example, if you inherited the property, you should also keep the records of your parents and grandparents.

Finally, if you operate a business from home or rent a room to a third party, you may be able to write off part of the adjusted basis through the rules on depreciation.

If you opt to factor in depreciation, you will not be able to exclude the depreciation amount you took under the gain exclusion tax break. However, any repairs you make to the portion of the home used for business or rental purposes may be tax-deductible.

TurboTax Can Help You Claim the Home Improvement Tax Deduction

Don't worry about how to claim the solar tax credit. Based on your answers, TurboTax will ask you simple questions and help you claim the home improvement tax deductions and credits you're eligible for.

You can connect live via one-way video to a TurboTax tax expert or CPA if you have questions. TurboTax Live tax experts and CPAs are available in English and Spanish and can also review, sign, and file your tax return.