1. Understand Which Improvements Qualify for Deductions or Credits
- Medical Home Improvements: If home improvements are medically necessary, you may be able to claim them as a medical expense deduction. This includes things like wheelchair ramps, lifts, or improvements to accommodate disabilities.
- Energy-Efficient Improvements: The IRS offers tax credits for energy-efficient home improvements under programs like the Residential Energy Efficient Property Credit or the Nonbusiness Energy Property Credit. These include improvements such as solar panels, wind turbines, or energy-efficient windows and doors. For example:
- Solar panels
- Solar water heaters
- Geothermal heat pumps
- Energy-efficient windows, insulation, and doors
These improvements may qualify for up to 30% tax credits, depending on the specific project and program. Make sure you get proper certifications and keep receipts. - Home Office Deductions: If you use part of your home exclusively for business purposes, some home improvement expenses related to your home office might be deductible. For example, if you build or renovate a room used as an office, you may be able to claim a portion of that cost.
To claim tax deductions, it's essential to maintain accurate records. You should:
- Save all receipts for materials, labor, and professional services used in the home improvement project.
- Keep detailed records of the purpose of the improvement (e.g., if it’s medical or energy-related).
- Take photos before, during, and after the improvements to document the work completed.
Since tax laws can be complicated, it’s often a good idea to consult a tax professional or accountant. They can help ensure you’re maximizing any available credits or deductions, and they can guide you on:
- How to apply for credits like the Energy Efficient Property Credit or Medical Expense Deduction.
- Determining if the improvement qualifies for any tax benefits.
- Properly calculating the deductible amount (some improvements may only allow you to deduct a portion of the cost, such as for home offices or medical improvements).
- If you are claiming deductions for home improvements as part of your medical expenses or other eligible expenses, you'll need to file Schedule A (Itemized Deductions) with your Form 1040.
- If you are claiming energy-efficient improvements, there are specific forms like Form 5695 (Residential Energy Credits) for claiming credits.
If you are making improvements to a rental property, you may be able to deduct the cost of improvements through depreciation. Instead of deducting the full cost in the year the improvement is made, the expense is spread out over several years (usually 27.5 years for residential rental properties).
6. Tax Benefits for Selling Your Home
- While home improvements are generally not directly deductible, they can increase your basis in the property, which can lower the amount of capital gains tax you might owe when selling your home. Keep track of all improvements made during your ownership.
- When you sell, you can reduce your taxable gain by the amount of eligible improvements made, which increases the home’s sale price for tax purposes.
Certain improvements may qualify for specific tax credits and deductions, so it's important to check IRS guidelines, such as:
- IRS Publication 502 (for medical expenses)
- IRS Publication 530 (for home ownership)
- IRS Form 5695 (for residential energy credits)
- Energy-efficient and medical home improvements may qualify for tax credits or deductions.
- Keep receipts, documents, and records of improvements.
- Consult a tax professional to ensure compliance and maximize benefits.
- File the appropriate forms (Schedule A for itemized deductions, Form 5695 for energy credits, etc.).
- Consider how improvements impact capital gains tax when selling your home.
