How will the home improvements I made on my home affect my tax situation? This question may cross your mind as you prepare for tax season. Or perhaps it was something you had thought about even before starting plans to make over parts of your house. The answer to this question isn’t straightforward and will vary according to each homeowner. But here, we will provide some insight into this subject so that you can prepare for tax season proactively.
Repairs vs. Improvements
Before you gather receipts of recent updates you’ve made to your home, you must determine whether you’ve done a repair or an improvement. Repairs are typically fixes that you make to restore an item to its original state. For instance, if your pipe isn’t working well and you patch it up, this is a repair. Additionally, if your windowpane is broken and you replace it, this is merely a repair.
On the other hand, improvements are changes that are undertaken with the goal of adding value to your home. For instance, renovating an unfinished attic space or remodeling a kitchen is considered making an improvement to a home.
Why is it important to know the difference? Because if you are seeking tax deductions, repairs aren’t deductible, but improvements are. Therefore, before making changes to your home, it is a good idea to know if your change qualifies as an improvement for tax purposes.
Tax Deductions vs. Tax Credits
As you are preparing to file your taxes this year, another important distinction you’ll need to keep in mind is the difference between tax deductions and tax credits. Although some people use these terms interchangeably, a tax deduction and a tax credit aren’t the same. According to the IRS, here is the difference.
- Deductions reduce your income before calculating the taxes you owe
- Credits reduce the tax you owe and may give you a refund, even if you don’t owe taxes
Tax Deductions When You Sell Your Home
You may be wondering if you can ever get any money back on the major upgrades that you’ve made to your home. The answer is yes, but the deduction can’t be taken until you decide to sell your home and successfully do so. Keeping great records of all the improvements you’ve made to your home over the years will allow you to reduce your taxable capital gains.
Thanks to the 2022 Inflation Reduction Act, if you decide to make changes to your home to improve its energy efficiency, chances are you will qualify for tax credits (which work differently than a deduction) within the next tax year. For instance, the federal government offers a federal solar tax credit for those who want to switch from traditional electricity to solar energy. For homeowners who aren’t interested in installing solar panels and using solar energy, there are other incentives available for swapping in Energy Star-qualified windows and exterior doors, HVACs, geothermal heat pumps, and more. The IRS website covers these energy incentives in more detail.
Home Improvements for Medical Care
Another tax deduction you may qualify for could be home improvements you make for medical reasons. If you are suffering from a long-term illness or have a disability that requires you to modify your home to get around without trouble, you could qualify. Home improvements for medical purposes are tax deductible once they exceed 7.5 percent of your adjusted gross income.
Keep in mind that these types of amendments must not improve the value of your home to be fully deductible. In other words, things like installing ramps, altering cabinet heights, adding railings, or modifying doorways and stairways are improvements you may need to make a home more accessible out of medical necessity so they can be deducted during tax season. But any change that is purely aesthetic or structural does not qualify. You can also claim this deduction if you have a spouse or dependent who is aging or has a disease that makes it difficult for them to walk or perform regular movements.
Home Office Upgrades
Another way you can get a tax deduction for improvements you make to your home is if you use a portion of the house to operate a legitimate business. If you decide to improve your office or workspace, you can deduct 100 percent of the costs.
If you run a business from your home and make a whole-house improvement that is not normally tax deductible, you can claim part of that improvement in your home office depreciable expense. For instance, you can deduct six percent if you make home improvements such as HVAC or roof replacement to a 3,000-square-foot home, and 500 square feet is dedicated office space.
What are some other things to keep in mind when it comes to taxes and home improvements? Here are some answers to frequently asked questions.
Is It a Good Idea to Save My Receipts for Improvements I’ve Made?
Yes, it’s smart to save all receipts as you upgrade your house over the years. When you sell the house, you may be able to recuperate some of this during the upcoming tax season. But you must have proof to be able to save on your remodel. Since some receipts can fade over time, it is also a good idea to digitally scan or photocopy these items and store them in a fire- and water-proof safe.
If I Receive Rental Income, Are There Any Tax Deductions?
Yes. Some tax deductions are available if you are receiving rental income from properties you are renting. Some items that may count are depreciation on the rental, property taxes, insurance on the rental, and some utilities. Since rental income can be classified as self-employment, you can also take deductions. For more information about this issue, visit the IRS website.
Can I Get Tax Deductions If I Am a House Flipper?
Not all house-flipping expenses are tax deductible, and just like any homeowner, you will have to wait until you sell to recuperate any money. Since house flipping can be a home business, there are some deductions you can take based on being self-employed. Some other items you can deduct include taxes, interests, closing costs, sales commission, renovation costs, and mileage on your car related to flipping the house.