Home improvements can increase both the value and the enjoyment of your home. You can also renovate your home to incorporate the newest technology like smart home systems or alarm systems from an automation or lock company. But whatever the reason for the home improvements, they can be costly. This leads to the question, ‘can home improvements be claimed on taxes?’
The answer is not a simple yes or no. This is good news for some homeowners because under some circumstances, you can deduct the expenses you incur for roof repair or other home improvements.
Here are some situations to answer the question, ‘can home improvements be claimed on taxes?’
Can Home Improvements Be Claimed on Taxes for a Residence?
If your home is used only as a residence, home improvements usually cannot be claimed on your income taxes.
The way income taxes work is that everything you receive must be claimed as income. This is your gross income. But the tax system is structured in brackets. This means that each chunk of your income is taxed at a different tax rate. For example, in 2021, the first $9,950 you make is taxed at 10%, the amount you make over $9,950 up to $40,525 is taxed at 12%, and so forth. Less taxable income means you pay lower amounts of tax and a lower percentage of your income in taxes.
You do not pay taxes on your gross income. Instead, you pay taxes on your adjusted gross income. This is your taxable income. There are three ways to reduce your taxes:
- Make less money: Less gross income means less taxable income. Less taxable income means lower taxes. But this is not a realistic tax strategy for most people because they need a minimum amount of income to survive. For example, if you make zero dollars, you pay zero taxes. That is not realistic for most people. For most people, choosing to earn $40,525 instead of $40,526 because you have to pay an extra $0.10 in taxes on that additional dollar does not make sense either. They would rather have the extra dollar even if they have to pay an additional $0.10 in taxes on it.
- Tax deductions: The way you calculate your taxable income from your gross income is by subtracting or ‘deducting’ allowable amounts from the gross income. Roughly speaking, taxable income equals gross income minus your deductions. This means that increasing your deductions will decrease your taxable income. Everyone is entitled to a standard deduction. But some people get more deductions by choosing to itemize rather than taking the standard deduction. This is where eligible deductions for home improvements would be reported and claimed.
- Tax credits: Tax credits are how the government supercharges behavior. Tax credits reduce your tax bill, usually dollar for dollar. This means that instead of tinkering with your income the way that tax deductions do, tax credits tinker with the amount of tax you owe. To understand the difference, take someone who is in the lowest tax bracket of 10%. A tax deduction of $1 reduces their taxes by $0.10 because 10% of $1 is $0.10. A tax credit of $1 to the same person reduces their taxes by $1. The same $1 tax benefit has ten times more tax-reducing power when it is a tax credit rather than a tax deduction in this example.
Because of their power in reducing your tax bill, you always look for tax credits first. If you cannot claim a tax credit, you then look at whether the expense is deductible. If an expense does not qualify you for a tax credit and is not deductible, it is a personal expense that cannot be claimed on your taxes.
With that long explanation, the IRS does not have a category of tax credits or tax deductions for home improvements. Thus, in most cases, the cost of home improvements, such as garage door installation, cannot be claimed on your federal income taxes.
But there are a few situations where you can fit the cost of a home improvement into another category of tax credit or deduction. This allows you to reduce your income taxes using your home improvement expenses.
Can Home Improvements Be Claimed on Taxes for Alternative Energy Systems?
Yes. This is one of the categories where certain types of home improvements can be claimed on your federal income taxes.
The federal government wants to encourage Americans to invest in clean and energy-efficient homes. One of the best ways to do this is by reducing the cost of the investment. As a result, the U.S. tax code offers a tax credit equal to 26% of your costs to purchase renewable energy systems. It also offers you up to $2,000 in tax credits for energy-efficient home improvements.
The renewable energy systems eligible for the 26% tax credit are:
- Solar electric: This electrical system converts sunlight into electricity using photovoltaic solar panels provided by an electrical installation service.
- Solar water heating: This water heating system circulates a working fluid through solar collectors and a heat exchanger. In the heat exchanger, the heat picked up from the sun shining on the solar collectors is transferred to the hot water system for the home.
- Wind energy: This electrical system uses a windmill to turn a turbine that generates electricity for the home.
- Geothermal heat pump: This HVAC system circulates a working fluid through the ground where the temperature is consistent and generally unaffected by the air temperature. In the summer, the ground is cooler than the air temperature and can cool air in a heat exchanger. In the winter, the ground is warmer than the air temperature and can warm air in a heat exchanger.
These tax credits can be substantial because you are allowed to include both material costs for the clean energy system and labor to install it. Thus, you can claim the entire charge from an HVAC service provider for supplying and installing a geothermal heat pump.
The tax code also offers tax credits for energy-efficient home improvements. These home improvements must use products certified by the U.S. Department of Energy as ‘6.0 Energy Star’ compliant to qualify for the tax credit. The home improvements that are eligible for the tax credit include:
Home insulation material
- Exterior doors
- Metal or asphalt roofing
- Exterior windows and skylights
Home improvements that fall into these categories provide you with a tax credit that reduces your tax bill. The tax credit is capped, but you can carry it over until you exhaust it or the tax credit expires. Currently, these tax credits are set to expire on January 1, 2024.
Can Home Improvements Be Claimed on Taxes for Low-Income Housing
Yes, owners who rent out property as low-income housing can claim them on their taxes. But how you handle the expenses depends on whether the property you rent out as low-income housing meets certain tests. If the housing meets the tests, renovating housing for low-income tenants can entitle you to a tax credit.
To get the low-income housing tax credit, you must work with leasing agents and realtors to rent to low-income tenants. The low-income housing tax credit provides three tests for your buildings. They only need to meet one to quality:
- At least 20% of housing units are rented to tenants with income that is 50% or less of ‘area median income adjusted for family size’ (AMI).
- At least 40% of housing units are rented to tenants with an income of 60% or less of AMI.
- At least 40% of housing units are rented to tenants with income averaging no more than 60% of AMI, and no units are rented to tenants with income greater than 80% of AMI.
Can Home Improvements Be Claimed on Taxes for Rental Property?
Yes. Since a rental property is a business, home improvements for the rental property are business expenses. Business expenses can be deducted. Depending on the nature of the expense, you might deduct it in a single year, or you may depreciate it over time and deduct a percentage each year for several years.
The rules for expensing and depreciating your costs are complicated. Before you decide how to treat your costs on your taxes, you should consult a tax preparer. A tax expert can ensure that you treat your home improvement costs consistent with tax law and tax regulations.
The tax professional can also help you choose the most advantageous treatment for your home improvement costs. Generally speaking, the greatest benefit comes from expensing your business costs. Expensing is when you deduct the entire cost in one year.
Home improvement costs for things that are consumed, like labor and paint, can usually be expensed. So, if you hire a furniture refinishing company to repair and stain the cabinets in your rental property, you can probably expense it. Both the labor and the stain were ‘used up’ when the repairs were done.
Home improvement costs for fixtures that will last for a long time, like appliances and countertops, must be depreciated. So, if you installed new cabinets rather than refinishing the existing cabinets, you will probably need to depreciate your costs. The new cabinets will remain in the home after the work is done.
Can Home Improvements Be Claimed on Taxes as Medical Expenses?
Sometimes. The tax code allows you to deduct qualified medical expenses if they make up more than 7.5% of your adjusted gross income. For example, if you had an adjustable gross income of $50,000, you can deduct whatever medical expenses exceed $3,750. If you had $5,000 in medical expenses, $1,250 will be deductible from your income taxes.
If a home improvement’s primary purpose is for medical care for you or a dependent in your home, you can deduct the expenses as a medical expense. Thus, the cost of installing bathroom grab bars, wheelchair ramps, widened doors, and modified light switches would all be deductible as medical expenses.
However, if a home improvement also increases the value of your home, you cannot deduct the portion that contributes to the increased value. Thus, installing a stairlift to carry someone up the stairs might be 100% deductible because it does not increase the value of your home. But having an elevator company install an elevator might only be partially deductible because it provides medical care but also increases the value of your home. For example, if you spend $10,000 installing an elevator and your home increases in value by $3,000, you can only deduct $7,000 on your taxes.
Can Home Improvements Be Claimed on Taxes for Home-Based Businesses?
Yes, but the amount will depend on the improvement and the business. Home improvements that benefit the entire house, including the part used for your home business, are only partially deductible. If you install a new HVAC system, and you use 20% of your home for your home business, you can depreciate 20% of the cost of the home improvement as a business expense.
But if the improvement is solely for the benefit of your home-based business, you can deduct the entire amount. For example, suppose you have a dog boarding business in your basement, and you install gates and dog runs for animal control. You can depreciate the entire cost of the home improvement because the gates and dog runs were installed strictly for your business and provide no benefit to the rest of the home.
This is even true for dual-purpose home improvements. For example, if you install bookcases in your home office, you can deduct 100% of the expense via depreciation even if you can store your personal books in the bookcases as well as your work-related books.
Figuring out the answer to ‘can home improvements be claimed on taxes?’ might require a tax professional. An accountant or tax lawyer should have the knowledge and experience to guide you in properly claiming home improvements on your income taxes.