Federal Tax Deductions for Home Renovation

Looking to spruce up your home without breaking the bank?

Renovation of a home is not generally an expense that can be deducted from your federal taxes, but there are a number of ways that you can use home renovations and improvements to minimize your taxes. These include both tax deductions and tax credits for renovations and improvements made to your home either at the time of purchase or after.

One way to save on the costs of home renovation is to make the improvements to the home at the time it is purchased.

If the mortgage you take out to buy a home includes additional money to make renovations, your acquisition cost for the home includes this amount. You can then deduct the interest on this amount from your income as part of your mortgage interest deduction.

Improvements to your home can also be deducted from your income as medical expenses if they are medically necessary.

The cost of installing entrance or exit ramps, modifying bathrooms, lowering cabinets, widening doors and hallways and adding handrails, among others, are home improvements that can be deducted as medical expenses. But the deduction amounts must be reasonable, given their medical purpose, and expenses incurred for aesthetic or architectural reasons cannot be deducted.

In other words, making a residence wheelchair accessible qualifies, but adding a sculpture garden does not.

Additionally, any amounts spent for these improvements that increase the value of your home cannot be claimed as a medical related expense.

One of the best ways to lower your taxes by improving your home is to take advantage of energy saving tax credits.

If you add insulation or install new energy efficient appliances, windows or doors, you can take some or all of the cost directly off your tax liability. The total amount of the credit is $500. The amount of the credit you can claim for each type of energy efficient upgrade is limited, however, so see Form 5695 for more information.
 

Under the home sale exemption, you do not have to pay capital gains on appreciation of your primary residence when you sell it if your profit is $250,000 or less. Because home renovations increase your basis in your home, they can help reduce the amount of your sale price that is counted as profit, and therefore can potentially help get you under the home sale exemption to avoid capital gains altogether. Even if not, the increased basis will limit the taxable portion of the sale price.

Remember, TurboTax Deluxe can help you find every tax deduction and credit you're entitled to, including those related to improving your home.