“Every dollar saved is a dollar earned.” When it comes to home renovations, this saying rings especially true. Renovating your home can be costly, but what many homeowners don’t realize is that some renovations may offer tax deductions or credits. Knowing which home improvements are tax deductible can help you save significantly when filing your taxes.
If you’re planning a renovation, or have recently completed one, this guide from our team at Construction Solutions, Inc. will walk you through the types of home improvements that can qualify for tax deductions, and how you can take advantage of these benefits.
Home Office Renovations
The pandemic changed how many of us work, with millions now setting up shop at home. If you’ve renovated or remodeled part of your home to create a dedicated office space, you may be able to deduct some of those expenses, especially if you’re self-employed.
The IRS allows deductions for home office improvements if the space is used exclusively and regularly for business purposes. The key here is “exclusive.” A guest bedroom that doubles as your office may not qualify, but a room solely dedicated to your business will. Additionally, if you rent your home and made renovations for your office, you may be able to deduct more expenses, such as a portion of your rent and utilities.
Actionable Tip: Keep meticulous records. Track every expense, including materials, labor, and even smaller purchases like office furniture or storage solutions. These details will come in handy when filing taxes.
Energy-Efficient Home Improvements
With the rising focus on sustainability, energy-efficient renovations are not only good for the planet—they’re also good for your wallet! Certain energy-efficient upgrades may qualify for tax credits under the Residential Energy Efficient Property Credit, which covers improvements like solar panels, wind turbines, and geothermal heat pumps.
In fact, installing solar panels can earn you a tax credit of up to 30% of the cost of the installation. This applies to both the cost of materials and labor, which can result in substantial savings. Other energy-efficient improvements, such as adding insulation, upgrading windows, or installing energy-efficient doors, may also qualify for smaller tax credits or deductions.
Actionable Tip: If you’re planning to install solar panels or make other energy-efficient upgrades, be sure to research the federal and state incentives available. These can change year-to-year, and taking advantage of the right program could lead to significant savings.
Medical-Related Home Improvements
If you’ve made home improvements to accommodate a medical condition or disability, some of these renovations may be tax deductible. The IRS allows deductions for modifications made to provide medical care, such as widening doorways for wheelchair access, installing ramps, adding handrails, or even modifying a bathroom for accessibility.
These types of improvements can be deducted as medical expenses if they don’t increase the value of your home. If the modifications do increase your home’s value, you can still deduct the difference between the cost of the improvement and the increase in property value. This is especially useful for homeowners making permanent changes to assist with mobility or long-term health needs.
Actionable Tip: You will need documentation from a healthcare provider stating that the improvements were necessary for medical reasons. Also, retain all receipts and proof of the renovation costs to include with your tax filing.
Home Renovations for Rental Properties
If you own rental property, renovations can be particularly beneficial come tax time. Improvements made to rental properties can often be deducted as business expenses. The IRS allows landlords to write off the cost of repairs and improvements that are necessary to maintain or upgrade the property for tenants.
However, there’s a distinction between repairs and improvements. Repairs, like fixing a leaky faucet or patching a hole in the wall, are generally deductible in the year they’re completed. Improvements—such as a full kitchen remodel or adding a new roof—typically must be depreciated over several years. This means you can deduct a portion of the improvement’s cost each year, spreading out the tax benefits.
Actionable Tip: If you’re unsure about which expenses can be fully deducted in the current year versus those that need to be depreciated, consult a tax professional. They can help you navigate the IRS rules and maximize your savings.
Capital Improvements for Selling Your Home
If you’re planning to sell your home and have made significant improvements to boost its value, you may be able to use those renovations to reduce your capital gains tax. Capital improvements are permanent structural changes that increase the value of your home, prolong its life, or adapt it to new uses. Examples include adding an extra room, remodeling a kitchen, or building a new deck.
When you sell your home, the IRS allows you to add the cost of these improvements to your home’s original purchase price (also known as the “basis”). This effectively reduces the amount of profit you’ll be taxed on when selling the property. Keep in mind that this only applies to major improvements, not routine maintenance or cosmetic upgrades.
Actionable Tip: Save all receipts and documents related to any major home renovations. When it’s time to sell, these records will be vital for reducing your capital gains tax liability.
Know the Tax Benefits Before You Renovate
Home renovations are often a significant investment, but knowing which projects offer tax deductions or credits can help ease the financial burden. Whether you’re updating your home office, making energy-efficient improvements, or preparing your property for sale, it’s important to stay informed about the tax advantages available to you.
At Construction Solutions, Inc., we understand that navigating tax laws can be complicated. That’s why we recommend consulting with a tax professional before starting any major renovations. By planning ahead and keeping detailed records, you can enjoy a beautiful home—and potentially save big when tax season rolls around!
Ready to start your next renovation project? Contact us today, and we’ll guide you through every step!
