Are Home Improvements Tax Deductible?

If you have been adding improvements to your home, you might be wondering if you can use those expenses to lower the cost of your taxes.

Unfortunately, you can’t use your home improvement expenses to reduce your taxes the year you make the improvements. However, you can lower your taxes the year you decide to sell your house if you keep track of all of the expenses you’ve used to improve it.

Of course, that’s just a general overview. To learn more about whether home improvements are tax-deductible, keep reading.

Are Home Improvements Tax Deductible?

Home improvements are tax-deductible, but not in the way you may think. The year you renovate or improve your home, you cannot use those expenses as tax deductions. Even so, keep all of your receipts so that they can be used to decrease your taxes in the future.

Whenever you decide to sell your home, any improvements that increase the home’s capital are added to your tax basis and decrease your taxes. Your tax basis is how much money you’ll subtract from the home’s sale price to earn your profit amount from the sale. The more you add to your tax basis, the less money you have to pay.

How It Works

You will add the tax basis to the amount of money spent on capital improvements. Capital improvements count as anything that increases the value of your home, extends its life, or allows the home to be used for new purposes.

If you do home improvements that fall under any of these categories, you can keep the receipts and use them to reduce your taxes the year you sell the house.

Exceptions

That being said, you are likely not going to see as big of a deduction as you might think. Today, many home sale profits are actually tax-free for the owners. What this means is that tracking all of your capital improvement expenses might not pay off.

Still, if you make a profit on your home, that profit may be taxable. There are laws that will determine how much profit you need to make in order for it to be taxable. As a result, it’s still a good idea to save your receipts. In case you are taxed, you have all of the documents you need to file for a tax deduction.

What Home Improvements Are Tax Deductible?

The only home improvements that are tax-deductible are capital improvements. Capital improvements must meet one or more of the following:

Many different home improvements can qualify as capital improvements. Many big-ticket improvements count including, adding an addition to the home, installing a swimming pool, installing a new roof, or installing a new central air conditioning system.

Capital improvements can be small as well. Using storm windows, an intercom system, and even a home security system can all qualify as capital improvements.

Of course, many energy-saving improvements are tax-deductible too. Many energy-saving improvements actually yield tax credits.

What About Home Repairs?

It’s important to distinguish capital improvements from regular home repairs. Whereas capital improvements are tax-deductible whenever you decide to sell your home, home repairs are not.

Home repairs include fixing a broken item or regularly maintaining your home and its value. For example, fixing a gutter or replacing a windowpane counts as a home repair, not a capital improvement. Painting rooms or installing a new ceiling fan do not count either. These items all maintain the home’s value, not increase it.

Tracking Your Expenses Is Key

If you want to see a tax deduction using your capital home improvement expenses, you have to track all of the expenses first. Today, it is easier than ever to track your expenses. You can track them with literal receipts, but you can track them electronically automatically too.

Any physical receipts should be saved in a special folder. Keep track of all of the improvements you’ve done to your home in this folder and consider downloading any receipt or files to an electronic file to save your documents automatically.

Once again, this diligent tracking might not be as profitable as it once was, but it is still worth your effort. Especially since it is so easy to track expenses today, you might as well do it so that you have all the documents you need in case you can use your expenses as a tax deduction.

Final Thoughts

Home improvements that qualify as capital improvements are tax-deductible whenever you sell your home, but they do not qualify the year that you actually installed the improvement. For this reason, you will have to keep your receipts and records on hand in case you decide to sell your home.

Remember, you don’t have to keep track of repairs—regular home repairs do not count as capital improvements. Only improvements that increase the value of your home will count.

Featured Image Credit: Matej Kastelic, Shutterstock