Tax-Deductible Home Repairs & Improvements

Tax credits directly reduce your tax bill dollar-for-dollar, while deductions lower your taxable income. Fortunately, certain home improvements not only enhance your living space but also offer tax benefits. From adding a new bedroom to upgrading rental properties, these improvements can potentially increase your tax refund. In this article, we’ll explore which home improvements qualify for tax deductions and how they apply to rental properties. Discover if you can write off your home improvements this year and kickstart your next project with potential IRS savings. Keep reading to learn more.

It’s essential to understand the disparity between a home improvement and a home repair before embarking on any projects for your home or rental property. This differentiation holds significant weight during tax season, as mischaracterizing a repair as an improvement on your tax return can lead to IRS complications.

To distinguish between the two, a repair involves restoring something to its original condition or fixing a defect. Conversely, an improvement enhances the value, functionality, or appearance of the property. Once you gras

As per the IRS, a capital improvement refers to any enhancement or alteration that significantly boosts the value of your property, extends its lifespan, or adjusts it for new purposes. Examples include increasing the number of bedrooms or bathrooms, as well as installing energy-efficient outdoor lighting.

Moreover, typical instances of home improvements encompass a new roof, driveway, septic system, or appliances. The tax treatment of these expenses varies—some may qualify for deductions or credits, contingent on the nature of the improvements made. It’s crucial to note that certain home improvements may only be deductible in the year of the property’s sale, underscoring the importance of retaining all receipts and documentation.

According to the IRS, a repair is defined as any alteration aimed at reinstating a home to its original state or value. For instance, fixing or replacing window screens typically doesn’t enhance the property’s value; it merely restores its original condition. Similarly, addressing mundane issues like repairing a leaky faucet or replacing a few damaged roof shingles falls under the category of repairs.

Generally, home repairs do not qualify for tax deductions. However, there are a few exceptions. Repairs conducted post a natural disaster, repairs made to a rental property, and repairs to a home office may be eligible for tax deductions. We’ll delve deeper into these exceptions shortly.

You have the opportunity, and it’s advisable, to claim tax deductions in the year when your home improvements were completed. However, certain improvements may need to be claimed over multiple years or can only be claimed upon the sale of the property. For example, any energy-efficient upgrades should be claimed for the energy efficiency tax credit within the same year. This also applies to improvements made to rental properties or home offices.

For projects like installing a new roof, deductions can be spread out over several years using a method called accelerated depreciation, or MACRS (modified accelerated cost recovery system). The IRS provides detailed information on this, or you can consult with a local tax professional for guidance on incorporating it into your tax return.

Here are some specific types of home improvement deductions you can make, depending on what changes you make to your home:

Several upgrades can enhance your home’s energy efficiency, such as geothermal heat pumps, solar-powered water heaters meeting at least half of the home’s water heating needs, and double- or triple-paned energy-efficient windows. While newer homes might already have these features, they’re often pursued as tax credits for older houses in need of updates. It’s worth noting that tax credits for energy-efficiency improvements can also be claimed for rental properties.

A home office is a designated area exclusively used for business purposes regularly. BudgetDumpster explains that improvements to a home office are deducted over time through depreciation, while repairs are deductible within the tax year they’re completed since they contribute to the upkeep of your business.

Common improvements may involve upgrades like fresh paint, improved lighting, or new flooring. If the pandemic prompted you to transition to more frequent or permanent remote work, investing in your home office could be a wise decision with potential tax benefits.

Unlike improvements to your primary residence, upgrades to rental properties don’t necessarily have to significantly increase the property’s value. Repairs may involve tasks like repairing damaged cabinets, fixing cracked tiles, replacing faulty appliances, or addressing issues with the air conditioning system.

Typically, minor repairs like these are conducted between tenant turnovers. These kinds of improvements should be claimed in the same tax year they were completed. However, major renovations such as remodeling a kitchen or bathroom can enhance the property’s value for many years, meaning you can’t deduct the entire cost in a single year.

Adapting your home to meet medical requirements can incur significant expenses, but you may be eligible to deduct a portion of these costs from your taxes. This is particularly useful if someone in your household requires modifications or upgrades for accessibility needs.

Beyond the initial improvement expenses, you can also deduct the costs associated with operating and maintaining these medically necessary enhancements. This includes items such as shower handrails, wheelchair ramps, widened doors and hallways, and any other modifications made to accommodate medical needs.

Tax deductions for improvements that enhance the resale value of your home extend beyond the year they’re completed because they provide lasting benefits to the property. These include permanent additions like security systems, swimming pools, or significant landscaping. As these improvements offer long-term value, their deductions are spread out over several years.

To deduct these costs over time, you can utilize MACRS depreciation. This involves following specific depreciation schedules tailored to the type of improvement, typically spanning under seven years. However, depreciation timelines can vary based on the nature of the enhancement. Consulting the IRS tax guidelines will provide clarity on the process to claim these depreciation deductions and effectively reduce your taxable income.

Claiming a tax deduction for repairs stemming from a natural disaster hinges on the event being designated as a ‘federally declared disaster’ by the President of the United States. While replacing roof shingles after strong winds may not qualify, a federally recognized tornado disaster would.

Technically, it’s not a direct tax deduction but rather relief for incurred damages or losses, aiding in repair budgeting. To benefit, you must itemize your deductions. However, if your insurance provider reimburses you, you’re ineligible for the deduction.

We recommend consulting with a local tax professional before embarking on any home renovations. Being prepared in advance is much simpler. It’s advisable to track your expenses as you go rather than scrambling for receipts come tax season.

Additionally, consider seeking advice from a real estate agent. Even if selling isn’t on your radar, exploring upgrades in comparable properties can offer inspiration or cautionary tales for your own project.

The most typical home improvements include kitchen updates, room additions, and door/window replacements. According to TaxAct, a mid-range kitchen remodel can recoup around 57% of the cost, while a mid-range bathroom remodel can recoup about 70%. Consulting a realtor can guide you on which upgrades will yield the best returns when you sell.

It’s important to note that opting for tax deductions typically entails itemizing your deductions. This is worthwhile only if your total itemized deductions surpass the IRS standard deduction, which is $12,550 for individuals and double that for married couples in the 2021 tax year. Consider this when tallying your expenses and preparing your taxes.

Undertaking home renovations can be quite the undertaking. It’s reassuring to know that you can potentially deduct some of the costs. However, it’s essential to research your specific improvements beforehand and diligently retain all receipts. If navigating tax deductions feels overwhelming, seeking guidance from a licensed accountant or tax professional is a wise move. With their expertise, you’ll not only enhance your home but also reap the financial rewards in due time.