If you’re planning on doing some home improvement projects, you might be wondering if you can deduct them from your taxes. Unfortunately, home improvements are not eligible as tax write-offs because they’re considered nondeductible personal expenses.
The Internal Revenue Service (IRS) considers a “home improvement” as anything that adds to the value of the home, extends its useful life, or alters its use. It includes modifications to the home’s heating, plumbing, heating, landscaping, and so on. If you’re improving your personal residence, you won’t be able to deduct the cost from your taxes.
This, however, doesn’t mean that you won’t benefit at all. Home improvements may reduce the taxes that you have to pay when you sell your home. This is because the cost to remodel or renovate a home is factored into your “tax basis”.
What is the tax basis?
In real estate, the “tax basis” or simply “basis” is the value of your home. When selling your home, your profit or loss is calculated by deducting the basis from the sales price (plus expenses such as commissions). In general, the higher the basis, the lower the profit.
Let’s take a look at this example. Let’s say you bought your house for $400,000 and made $40,000 in improvements. Your tax basis would be $440,000 ($400,000 + $40,000). If you sell the home for $800,000, your gain from the sale would be $360,000 — this is also the amount that will be subject to tax.
That’s why homeowners tend to improve their homes before selling. In the example above, if you spend $100,000 on home improvements, the taxable amount would be much lower at a mere $300,000. To calculate whether you’ll make a profit from your sale, consider hiring a property manager.
What home improvements are tax-deductible when selling?
Not all home improvements are tax-deductible. As a rule of thumb, for a project to be considered an “improvement”, it must add value to the home. Below, we’ll go over a few of the tax-deductible home improvements according to the IRS:
- Bathroom remodel
- Bedroom remodel
- Kitchen remodel
- Addition of a deck, garage, porch, or patio
- Landscaping upgrades
- Addition of a swimming pool
- Installation of a fence and retaining wall
- Upgraded insulation for floors, walls, attics, pipes, and ductwork
- Improved plumbing (e.g. septic system, filtration system, water heater)
- Improved heating and cooling systems
- Improved filtration systems
- Improved security systems
- Improved wiring
- Addition of storm windows and doors
- New roof
- New siding
- New flooring
- Installation of a satellite dish
- Installation of built-in appliances
The list of home improvements that can increase your basis is much more comprehensive. That’s why we advise working with a luxury property maintenance company to determine if you’re eligible for tax deductions.
It’s worth mentioning that the improvements must be present when you sell your home. For instance, if you add storm windows, those windows should still be part of the house when you sell.
What home improvements increase the value of the home?
In general, you should prioritize improvements that increase the value of the home. These include:
- Increasing your square footage. This is one of the best ways to increase your home’s value. By providing your prospective homebuyer with more livable space, you’ll be able to sell your home for much more.
- Enhance the curb appeal. Visually appealing homes attract a wider pool of homebuyers. Consider boosting your home’s curb appeal by repainting the exterior walls, touching up the landscaping, and so on.
- Remodel the kitchen and bathroom. Kitchen and bathroom upgrades offer the biggest returns. This is because they’re two of the most “used” rooms in the house. If you’re interested in remodeling your kitchen, you might want to read our article on the “7 Kitchen Upgrades to Make Before Selling Your Home.”
What do you need to show to the IRS?
You need to prove your tax basis to the IRS. That’s why it’s advisable to document your home improvements with receipts, purchase orders, and other records. This allows you to keep track of your projects especially if you renovate or remodel your home often.
In addition, keep your tax basis records in a safe place. If you have a safety deposit box, you might want to store them in there. You might also consider making digital copies of your tax basis records.
Are there home improvements that are deductible from your tax return?
There are two times when you may be eligible for a tax break for improvements done to your personal residence.
#1 Installation of energy-efficient equipment
If you installed energy-efficient equipment such as solar systems, geothermal heat pumps, wind turbines, etc., you may claim the Renewable Energy Tax Credit. A tax credit is a reduction in your overall tax bill. According to the IRS, if you made “energy-saving improvements” to your personal residence, your taxes will be reduced by 26% of the cost to install the equipment. This also applies to vacation homes.
#2 Renovations for medical purposes
The IRS allows you to deduct medical expenses from your taxable income. This applies to medical expenses that were paid out-of-pocket, which means that it doesn’t include expenses covered by your health insurance.
Hence, if you’ve renovated your home to accommodate a physically disabled person (e.g. yourself, your children, or your spouse) or installed medical equipment, you’ll be able to deduct these costs from your taxes.
For example, if you widen your doorways for wheelchair access, you will for a tax deduction as long as the cost doesn’t exceed the value of the property.
Unless you’re improving your home to be more energy-efficient or to accommodate a household member’s medical condition, you won’t be able to benefit from tax breaks now. However, the amount you spent on home improvement projects will be deductible once you sell.
To ensure that you profit from your sale, stick to projects that increase your home’s value. The property managers at Luxury Property Care can help you pinpoint the upgrades that your property needs. We’re real estate experts who’ve helped hundreds of homeowners make the most out of their South Florida properties.