Home Improvement Projects That Offer Tax Benefits

Updated September 21, 2023

There are several tax deduction and credit options that exist for home renovations and improvements. Make sure you’re aware of all the possibilities and incentives available to you to ensure you don't miss out.

^{Disclaimer: We are not tax professionals. As such, we can’t guarantee the information below is accurate for every person in every case. Consult your CPA or financial advisor for the most up-to-date information regarding financial advice and tax laws in your area.}

Are home improvement costs tax-deductible?

Generally speaking, home renovations and improvements are not a tax-deductible expense per se.

However, there are a number of ways home improvements can be used to help minimize your tax burden, such as deductions and credits.

Energy-Efficient Systems

Choose energy-efficient improvements that reduce your footprint. These may qualify you for tax credits, which would help offset some of the costs.

You may not be able to claim Energy Star appliances or water-saving improvements, like low-flow toilets or shower heads on your federal return, but you can receive a federal tax credit for qualified improvements, like:

insulation
roofing products
energy-efficient heating, ventilating or cooling systems
energy-efficient windows, doors, or skylights
solar and non-solar water heaters
solar energy systems
geothermal heat pumps
biomass stoves
wind turbines
fuel cells

The federal government offers two options for such tax credits, as of the 2019 tax year.

The first option is the Residential Renewable Energy Tax Credit, and the second is the Nonbusiness Energy Property Tax Credit.

You can claim these credits by filing Form 5695 with your tax return.

Learn more about who can take the credit

Educate yourself on the various energy or water-saving incentives offered by state governments, local municipalities, or utility companies. A quick search online (e.g. “Michigan energy incentive”) will show you what’s available in your area.

Medically Necessary Improvements

If your home improvements are necessary due to medical reasons—modifying bathrooms, lowering cabinets, widening hallways and doors, or installing ramps to accommodate wheelchair access—then you may be eligible for a deduction.

However, if these improvements are done exclusively to increase the value of your home, they cannot be claimed as a medical expense.

Home Office

Do your home upgrades include a home office?

If you have a legitimate business and you use part of your home exclusively to handle the business on a regular basis, you may be eligible for a home office deduction.

If you qualify, you can deduct 100% of the cost of the improvements made to your home office.

Improvements that benefit your entire home are depreciable depending on the amount of your home that is used as an office.

For example, if your home office occupies 10% of your home, and you upgrade your home’s HVAC system, 10% of the cost will be depreciated.

Renting

Similar to the home office deduction, if you rent out a portion of your home—whether a room or entire floor—the upgrades will be covered or deducted proportionately.

Keep track of all your home improvement receipts and the amount of money spent on the home over the years. This is beneficial not just for possible tax savings but also to help justify your selling price.

Home Sale Exemption

When you sell your home, you typically have to pay capital gains if you make a profit of more than $250,000.

Because home improvements and renovations increase your basis—or the total amount you’ve invested—in your home, they can help keep you under the home sale exemption ($250,00 or less).

In this case, you might be able to avoid paying capital gains entirely.

Even if you still have to pay capital gains, your increased basis from the home updates will reduce the portion of the sale price that’s considered taxable.

Keep reading:

Can home improvements be covered by my mortgage?

One of the easiest ways to reduce the burden of home improvement costs is by making improvements immediately upon purchasing the home.

If your mortgage includes additional money to accommodate renovations and improvements, your “acquisition cost” for the home will include this amount.

Learn more about the 203(k) mortgage loans

Keep reading about home improvements:

How do I find the right contractor for the job?

Make sure you hire the right person to handle your home updates because an update that isn't completed properly is simply a waste of money.

Hometown Demolition Contractors is the simplest and most effective way to find the right contractor for your home remodel.

Let us know where your project is and a little bit about what you need to be done, and we'll send your quote request on your behalf to any interior demolition contractors qualified to do the work.

Learn more about hiring the best contractor: