Federal Tax Deductions for Home Renovation
There are a number of ways that you can use home renovations and improvements to minimize your taxes.
Key Takeaways
- Home renovations typically do not qualify for federal tax deductions, but certain improvements may qualify for deductions and credits can help reduce taxes.
- Financing home improvements through your mortgage may allow you to claim the interest as a mortgage interest deduction.
- Medically necessary home improvements can be claimed as medical expenses if they are reasonable and do not add value to the home.
- Installing qualified energy-generating systems like solar panels may qualify you for a federal tax credit covering 30% of the installation cost.
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.
Using your mortgage to make home improvements
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 include the interest on this amount as a potential mortgage interest deduction if you are itemizing your deductions.
Also, if you take equity out of your home using a cash-out refinance, second mortgage or home equity line of credit, you can include the interest on this money as home mortgage interest as long as it is used to improve your home.
Improvements that qualify as medical expenses
Improvements to your home can also be included as a medical expense 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 included as medical expenses if you itemize your deductions. 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.
TurboTax Tip:
It's important to keep track of your renovation spending so that you can use it to increase your home's basis, potentially lowering the taxable portion of the sale price and aiding in avoiding capital gains tax when selling your primary residence.
Tax credits for energy generation
One of the best home improvements that can lower your taxes is to take advantage of energy tax credits by installing qualified energy generating systems.
You can get a federal tax credit of 30% of the cost of qualifying geothermal heat pumps, solar water heaters, solar panels, small wind turbines, or fuel cells placed in service for an existing or new construction home. The credits are good through 2032 and then step down in 2033 and 2034 after which they are scheduled to go away.
The credit applies to the cost, including labor and installation, and there is no maximum limit, except that fuel cells have a credit limit of $500 for each 0.5 kilowatt (kW) pf capacity. For example, if you purchase and install qualifying solar panels in 2024 for $10,000, you get a $3,000 tax credit right off the bat—not counting the future savings on your electric bill.
Home sale exemption
Using the home sale exemption, qualified sellers do not have to pay capital gains on appreciation of their primary residence when it is sold for a profit of $250,000 or less if filing as single and $500,000 or less if filing married filing joint. Because home renovations increase the 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 to avoid capital gains while increasing the value of your home. Even if not, the increased basis can limit the taxable portion of the sales price.
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