Welcome to Friends with Tax Benefits. In the fifth episode of season two, Friends with Tax Benefits hosts Daniel Thrall and Lauren Thomas will be joined by Lauren Bowling, a financial blogger at the website FinancialBestLife. The friends explore how home improvement expenses — or even just repairs on your property — could impact your taxes.
In the second part of the episode, TurboTax Expert Diana Castro, answers your questions about what’s tax deductible and what’s not. Of course, when you’ve got a hammer in one hand and an impressive array of nails in the other, tax deductions are probably the last thing on your mind — so to dig in even further, we have it all laid out for you here, too.
Let’s take a look at home improvements and property repairs and what all this means for tax purposes.
Quick Answer: Home Improvements and Tax Deductions
So, are home improvements tax deductible?
The simple answer is “not exactly.”
Let’s say you’re making a home improvement in the year 2023. Maybe you’re adding a home office or finally renovating that first-floor bathroom that everyone hates. Although this might seem like a hefty expense, it’s not one that reduces your taxable income or becomes a deduction on your income tax return.
However, home improvements may still be good news for tax purposes. In fact, they may help you reduce your tax bill in the future.
So you made that big home improvement in 2023, but now it’s 2030 and you’re ready to move. Congratulations — although you didn’t get tax deductions at first, you might be able to use that expense on your 2030 tax return.
Keep track of your home improvements and their costs because there’s a chance they may be helpful later.
Are There Any Exceptions?
Depending on your financial situation and the kinds of improvements you made to your property, there are some cases where certain home improvements might be tax deductible. Let’s take a closer look:
Energy-Efficient Home Improvements
According to the Internal Revenue Service (IRS), you may qualify for the “Energy Efficient Home Improvement Credit” if you make certain changes to your home. The original opportunity, offered through December 31, 2022, was a $500 lifetime tax credit. Beginning January 1, 2023, the credit is 30% of what you pay for certain improvements, including:
- Qualified energy efficiency improvements installed during the tax year.
- Residential energy property expenditures during the tax year.
- Home energy audits during the tax year.
Of course, there are certain limits — so be sure to do your research.
Home Improvements for Medical Purposes
In some cases, you may be able to deduct qualifying medical expenses exceeding 7.5% of your adjusted gross income (AGI). Here’s how the IRS explains it:
“Medical care expenses include payments for the diagnosis, cure, mitigation, treatment or prevention of disease, or payments for treatments affecting any structure or function of the body.”
A medical expense can refer to doctors’ fees, medications, ambulance transportation and more — but it can also mean home alterations or equipment installation to accommodate health problems.
It’s important to note that the main purpose of the improvements must be medically necessary for you, your spouse or your dependents.
If you are renting a house and made improvements based on your doctor’s advice and the landlord didn’t pay any cost of buying or installing the improvements (and didn’t lower the rent), you could include the entire amount of the improvement in medical expenses.
Home Improvement Loan Deductions
In some cases, you may be able to claim a deduction for a home improvement loan. The general rule of thumb is that you can deduct the home equity loan interest as long as you use the money to “buy, build or substantially improve your home.”
If you want a loan to be considered for a potential deduction, it must be less than $750,000 — or $375,000 if you’re married and filing separately.
Remember, you won’t get tax deductions for the full value of the loan, but the interest paid on that loan.
What About Rental Property Improvements or a Home Office Deduction?
The rules change a little when you’re using real estate to make money. Here are three important examples:
If a rental property is part of your income, it’s part of your taxes. Luckily, the rules about improvements and repairs are a little different for this kind of real estate. Here’s what the IRS has to say:
“You can deduct the costs of certain materials, supplies, repairs and maintenance that you make to your rental property to keep your property in good operating condition.”
However, there’s a caveat: You can’t deduct the cost of improvements. Those costs refer to three things:
- Adaptation to a new or different use.
You can recover a portion of certain expenses through a process called “depreciation,” in which you deduct the cost over a longer period of time. That means you might spread a single cost over three years — or up to 27.5 years.
The rules are also different if you use part of your house as a home office for your self-employed business. To qualify as a proper home office, you must choose a space and use it both regularly and exclusively for your business — which means you can’t also use it as a playroom for your kids or a recording studio for your blossoming music career.
Once you’ve got the basics covered, you can start researching whether your home office expenses are a tax deduction. If you qualify, you may be able to deduct up to 100% of the cost of home office improvements. That’s because these count as a “business expense,” which is good news for your tax return.
Because a home office is, of course, still part of your home, you may also be able to deduct or depreciate a portion of larger improvements. To do that, you’d need to calculate how much of your property you use as office space exclusive to your business. If that amounts to, say, 10%, you could depreciate 10% of an expense such as an HVAC system.
If you rent out part of your home, you can depreciate certain expenses. It’s the same as with a home office:
- Improvements to the rented portion of the property can be depreciated in full.
- Whole-home improvements can be depreciated based on the percentage of the property that is used as a rental.
Home Improvement vs. Home Repair
Although the terms may seem interchangeable, there’s actually a big difference between “home improvement” and “home repair” — at least as far as the IRS is concerned. You need to know the difference, because each has its own tax rules and potential for tax deductions.
Home improvement can mean a lot of things. Sometimes called a “capital improvement,” these changes are defined by the IRS as follows:
“Improvements add to the value of your home, prolong its useful life, or adapt it to new uses.”
Remember, you generally can’t deduct capital improvements in the year you incur them. However, you may be able to depreciate them if you claim part of your property as a home office.
- Adding a bedroom or bathroom.
- Building a deck.
- Improving your landscaping, including walkways, fences, swimming pools and more.
- Improving insulation in the attic, walls, floors and more.
- Upgrading your plumbing systems.
- Installing a security system.
- Adding air or water filtration systems.
- Maintenance that is necessary to keep your home in good condition but doesn’t add value or prolong the property’s life.
- Improvements that are no longer part of your home or have been replaced.
- Improvements with a life expectancy of less than one year.
Home repair falls into the “necessary maintenance” category, so it’s part of those non-deductible improvements. In some cases, you may be able to decide what counts as a repair vs. an improvement, but that’s generally only applicable to rental property.
Learn How To Make Home Improvements Work for You
There’s a lot to know about home improvements and whether they’re tax deductible. While you may be more focused on that hammer and all those nails, you should still brush up on these rules — not because they’re guaranteed to save you money right now, but because they could impact your taxes in the future. Plus, if you have a home office or rental property, it’s especially important to stay on top of your tax responsibilities.
Learn more about property improvements, repairs and relevant tax rules in this episode of our podcast, Friends with Tax Benefits:
Don’t worry about knowing these tax rules. Meet with a TurboTax Expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.
The views, information or opinions expressed during the Friends with Tax Benefits podcast series are solely those of the individuals involved and do not represent those of Intuit, TurboTax or any of its brands. The primary purpose of this podcast series is to educate and inform. This podcast series does not constitute financial, legal or other professional advice or services.
Podcast: Can I Deduct That? Tax Tricks for Influencers