Writing off that in-ground swimming pool or that brand-new roof would certainly be nice, right? Unfortunately, for the most part, home improvements are not tax-deductible.
In fact, with the exception of a few scenarios, most home improvements will actually have the opposite effect, causing higher property taxes down the line.
Are you planning on making a few upgrades to your house or a rental property you own? Here are a few times when you might be able to write off your costs.
Tax deduction 1: Home improvements that double as medical expenses
If your improvements are medically related, there's a chance you can write off their cost -- or at least a portion of them. First, the improvements have to be related to the "diagnosis, cure, mitigation, treatment, or prevention" of a disease or underlying medical condition for someone in the house.
Here are a few improvements that qualify, per IRS rules:
- Adding entry ramps or lifts.
- Installing railings or support bars.
- Widening doorways and hallways.
- Lowering cabinets and sinks.
- Moving electrical outlets, fixtures, door hardware, etc.
- Moving or modifying fire alarms and smoke detectors.
Beyond this, the improvements also need to have been paid out of pocket and not reimbursed in any way by your health insurance. You'll also need to itemize your tax return, and the expenses must exceed 7.5% of your adjusted gross income for the year. You can only deduct the amount that goes beyond the 7.5% threshold.
Tax deduction 2: Certain energy-related improvements
Certain energy-efficient improvements can qualify you for tax credits. These aren't technically tax deductions. Instead of reducing the amount of income you report, they actually lower your final tax bill -- the total amount of income tax you owe the IRS.
The most notable tax credit is the residential renewable energy tax credit. This one lets you reduce your tax burden by 22% to 30% of your project's costs. Some improvements that qualify include:
- Solar energy systems.
- Solar roofing, tiles, and shingles.
- Geothermal heat pumps.
- Solar water heaters.
- Wind turbines.
- Renewable fuel cells.
There's a similar tax credit program for businesses, too, and depending on your locale, you may qualify for various municipal rebates as well. Check this resource for potential savings options in your area.
Tax deduction 3: Using a HELOC or home equity loan to pay for your improvements
Using home equity lines of credit (HELOCs) and loans can be smart ways to pay for home improvements. Doing so may even qualify you for another tax deduction, which allows you to write off any interest paid on your HELOC or home equity loan throughout the year.
Here's the catch, though: To claim the deduction, you need to itemize your tax return. You also need to use the funds to improve the value of the home -- specifically to "buy, build, or substantially improve" your primary residence.
Finally, there's yet another caveat. Since it qualifies as a state and local tax (SALT) deduction, the interest you deduct -- plus any state and local taxes you write off with it -- can't surpass $10,000.
Tax deduction 4: Rolling your home improvement costs into your initial mortgage
As a homeowner, you're allowed to write off any interest you pay on your mortgage loan across the year (as long as you itemize). This can come in handy if you use a 203k loan, HomeStyle loan, or other improvement loan to both purchase your home and finance your project costs simultaneously. Just use the funds as planned, and deduct your total interest from your taxable income.
One other tax benefit of home improvements
When it comes to home improvements, that's about where the tax deductions end. When you sell the home, though, there's one more benefit you'll enjoy -- and that's on your capital gains taxes.
When you improve a home's value (called a capital improvement), you increase the cost basis of the property and thereby increase the amount of tax-free capital gains you can pocket once you sell. You don't have to pay capital gains tax if your profit is less than $250,000 if filing single or $500,000 if married filing jointly, and a higher cost basis shrinks your profit margin -- at least in the IRS's eyes.
Don't forget these other tax deductions homeowners may be eligible for
Fortunately, home improvements aren't your only hope for lowering that tax liability. If you're a homeowner, there are a number of other deductions and write-offs you could be eligible for.
Here are just a few:
- Property taxes. You can deduct the total of your annual property tax bill, which in some areas can mean a hefty amount of cash. Just remember: You can only have $10,000 in total SALT deductions, so you may have to pick and choose what you deduct.
- Home office expenses. Work out of the home, even part of the time? Then you can deduct a portion of your home office expenses, including things like rent, Wi-Fi, your desk, and more.
- Points. If you just purchased the house in the tax year you're filing for, you can deduct any discount points you paid to lower your loan's interest rate. Check your closing documents if you're not sure you paid points.
- Mortgage insurance. The premiums for both private mortgage insurance (PMI) and mortgage insurance premium (MIP) are deductible. You can deduct your upfront premiums and the ones you pay annually.
Most of these deductions require you to itemize your tax returns. To make sure this is the smartest move for your finances, total up your itemized deductions and compare them to the standard deduction you qualify for. In many cases, the standard deduction will offer bigger savings (not to mention less hassle) than itemizing will.
Keep in mind that real estate investors and rental property owners may qualify for additional deductions beyond these, since many items can qualify as business expenses.
When in doubt, reach out
If you're not sure what the best move is for your tax return, reach out to a qualified tax professional for help. They'll be able to point you in the right direction, as well as ensure you maximize any deductions you might be eligible for.