Home improvements help restore your house to its former beauty or bring it to new heights. Still, most of you might be deterred by the costs involved and more importantly, whether they are tax-deductible.
Generally speaking, home improvements are not tax-deductible. However, there are some exceptions with which you can claim credit or file tax deductions. Here’s what you need to know about home improvements and which of them are tax-deductible.
Understanding Capital Improvements
To start, all capital improvements are tax-deductible. The tax department for the state of New York explains a capital improvement as an addition or alteration to a property a real estate property that meets all conditions:
- The improvement substantially adds to the value of the property or prolongs its useful life
- It becomes part of, or permanently affixed, to the property; removal of the improvement would cause damage to the property.
- The improvement is intended to be permanent.
Additionally, the Internal Revenue Service lists examples of capital improvements to include the following:
- Additions such as decks, a new room, a garage, poches, and patios.
- Improvements to lawn and grounds including landscaping works, driveways, walkways, or swimming pools.
- Home exterior modifications such as the addition of storm windows or installation of a new door.
- Improvements to insulation like walls, floors, piping, or ducting works.
- Addition of heating, centralized air conditioning, humidifiers, vacuums, filter systems, wiring, security, and other similar systems.
- Plumbing works including water heaters and filters, septic systems , soft water systems, and more.
- Interior modifications like built-in appliances, fireplaces, and wall-to-wall carpets.
The amount of capital investment you’ve put into the property is based on the value added to your home by these additions or modifications. This increased valuation of your property can also help you save money on taxes if you turn a profit by selling this asset–this profit is often noted as the capital gain.
This capital gain, which is a form of income, is taxable and as such, must be reported. There are exceptions to the capital gains tax, though. For example, if the profit is less than a certain amount and the asset sold has been in your possession for more than five years, there’s no need to include capital gain in the tax reports.
Are Repairs Included?
Since the IRS grants special tax exemptions for qualified capital improvements, most homeowners might start looking for repair activities and check whether they qualify too. Most repair works and general maintenance activities are not included for tax deductions.
Repairs are only qualified for a tax deduction if they’re a part of valid capital improvement work. For example, fixing a gutter is ordinarily considered a repair job but if it’s a part of a larger work, such as relining gutters because of a house extension project, then it might also be considered. Similarly, replacing one window is routine repair or maintenance work but replacing it as a part of an overall design change in the home might also qualify.
Simply put, any renovation or maintenance or any activities necessary to keep a real estate property in good condition are not qualified unless they add value to the asset.
Additional Tax-Deductible Home Improvements
Upon meeting certain requirements, you can further qualify for tax deductions or tax credits. Be reminded that while both deductions and credits are beneficial, they work differently. A tax deduction is taken off from your income before you compute your taxes while a tax credit is an amount you can subtract from the computed taxes you owe the government.
Tax Deduction: Home Improvements for Medical Reasons
If the main purpose behind a home improvement effort is to help provide medical care for you, the owner, or your dependents or spouses, you can report it as a medical expense when you file your taxes. Similarly, if a permanent improvement for the same purpose adds value to your home, it can also be reported as a medical expense. This in turn, can qualify you for a tax deduction.
The medical expense you can report can be derived from the difference between the increase in your home’s value and the cost of the home improvement. This means that if the medically-motivated home improvement does not result in an increase in the home value, you can report the entire improvement cost as a medical expense.
Common home improvements qualified as medical expenses include adding ramps, widening doorways or hallways, adding railings and support bars, adjusting kitchen counters and cabinets, changing alarms and detectors, and similar modifications to your home.
Tax Credit: Home Improvements for Energy Efficiency
Certain home improvements can help turn your home into a more energy-efficient structure and could make you qualify for an IRS energy incentive known as the residential energy-efficient property credit. This allows you to receive a credit equivalent to the applicable percentage of the cost of the qualified property.
Qualified properties under this tax credit include solar electric properties, solar water heaters, small wind turbines, fuel cell properties, geothermal heat pumps, and qualified biomass fuel properties–with fuel cells subject to a $500 limit for each half-kilowatt of capacity. Also, this tax credit opportunity is only applicable for home improvements installed before December 31, 2021.
Knowing which part of your home improvement plans are tax-deductible could greatly help you in your next tax planning session as well as your overall budget. Properly filing your tax credit and tax-deductible-qualified improvements help you save on your taxes, giving you more funds you can use for other purposes.