Have You Ever Wondered If Home Improvements Are Tax Deductible?

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Home improvements can be a great way to increase the value of your home. Is home improvements tax deductible? The answer is yes, but it depends on what type of improvement you make and who pays for it. For those considering making home improvements, the first step you should take is researching and working out how these home alterations will affect your taxes. 
If you’re a landlord making repairs to your rented accommodation, a business owner making business-related improvements and repairs, or adding home improvements to your home for medical reasons, you are eligible for tax deductions! Better still - if you’re just looking to make home improvements to your property, although you can’t deduct tax like you can as a landlord or business owner, you are eligible for home improvement tax credit 2021.
If you're thinking about making home improvements and are unsure whether your project is tax-deductible, or if you’re debating whether home improvements are worth the investments, you’ve come to the right place! Read on for more information on repairs and maintenance tax deductions, what types of repairs and improvements are tax-deductible, who qualifies for tax deductions, and more!

Home Repairs Vs Home Improvements

Home improvements and home repairs are like two sides of the same coin. While they are similar, the IRS treats each differently - these differences are highlighted under IRS rules. However, both are classed as home expenses. So, what home expenses are tax-deductible? To understand which kind of expenses are tax-deductible, you need to know the difference between them both. The IRS outlines the two types of projects in separate categories with different tax implications:

Home Repairs

Repairs maintain or bring your property back to its original state The IRS defines repairs as “any modification that restores a home to its original state and/or value” - think replacing outdated and broken windows or repairing a leaky faucet. This kind of property work is essential, but unfortunately, they aren’t necessarily classed as tax-deductible expenses.
Unless your repairs are on a business property or on a property you rent out, any repairs - even essential ones - you’ll have to pay tax for. Any repair you make to your home must only restore the area back to its original condition, so if your repair adds any value or enhances your home won’t be classed as a repair - instead, it will be classed as an improvement.

Home Improvements

Improvements add value to your house, like adding a central air conditioning system or converting your basement into an office. The question ‘are home improvements tax deductible’ isn’t such a straightforward answer, as it truly does depend on the improvement! If the improvements you’re making on your property are purely for cosmetic reasons, like changing your flooring for a nicer kind or adding an en suite, you won’t be eligible for tax deductions but you could save money by applying for a home improvement tax credit 2021.

How To Save Money On Home Improvements And Repairs

As discussed above, repairs and maintenance tax deductions are only accepted on rented or business properties. As for the question ‘are home improvements tax deductible’, the answer is yes - but only for landlords, business owners, and improvements for energy efficiency or medical reasons. Here are some ways you can save money on your home improvements and repairs in terms of tax: 

Add A Home Office

Are home improvements tax deductible for offices? Absolutely! You can actually claim tax deductions for both office repairs and improvements. You can claim tax deductions on business properties, like offices that you own. If you don’t own the office space you use, you can easily add an office room to your home which would be eligible for tax deductions.
As long as you use your home office room exclusively for your business, you can deduct home renovation expenses. You must also be self-employed and be running your business from your home.

How To Work Out Your Home Office Deductible Taxes?

If your repairs or improvements are regarding the room used as your home office, you’ll get a 100% deduction. For example, if you’ve converted a bedroom in your home into an office and decide to install new flooring, you can depreciate the entire cost as a business expense. If you’re making repairs or improvements to your home that affect your entire house, you can get a tax deduction for this too - but not for the entire amount.
As the repair or improvement benefits other areas of your house, you can’t ask for the entire amount. Repairs and improvements that are included in this category are things like upgrading your home heating or air conditioning system. The deductible amount is determined by the size of your home office in relation to your entire home.
For example, if your home office takes up 20% of the space in your home, your deductible tax would be 20% of your repairs.

Rent A Room (Or Entire Property) Out

Is home improvements tax deductible for the rented accommodation? In short, yes - but only as the landlord. If you are the renter and decide to pay for repairs or improvements yourself, you won’t be eligible for tax deductions. If you have a second property, you can rent it out and then claim tax deductions on any repairs and improvements. The same goes for if you decide to rent out a room in your current home.
For those renting out an entire property, you can claim tax deductions on repairs as they go towards maintaining the property your tenant lives in. For those renting out a room in their home, repairs and improvements can be deducted, but you may not get the entire amount. 

How To Work Out Your Rented Property Improvement Deductible Taxes?

If you want to work out the amount you can deduct from a repair or improvement on a rented room in your house, you will use the same process that’s used for home offices. If the improvement or repair only affects that one room you can deduct 100%, if it affects the entire home, you can only take the percentage the room is in comparison to your home. This amount is then deducted from the rental income you receive.
If you are renting out an entire property, you can deduct 100% of the expenses from repairs and improvements to the rented property - this amount is also then deducted from the rental income you receive.

Add Qualifying Medical Improvements

If you or someone in your home has a medical condition that requires any types of home improvements, these are tax-deductible. Things like building ramps or widening doorways for wheelchair access, adding a lift, or installing support bars are medical improvements. The installation of such home improvements must be for the full purpose of providing medical care to you or an individual on your property.

How To Work Out Your Medical Improvement Deductible Taxes?

As long as these medical home improvements don’t add value to your home, you’ll be able to deduct tax for the full amount. In some instances, however, improvements for medical reasons could add value to your home, even if you didn’t intend for it to happen. For example, installing an elevator would help disabled individuals from climbing the stairs, but it would also increase the house value.
If your improvement increases the value of your property, you must reduce the amount of your deduction by the increase in the value of your home.

Make Energy-Efficient Changes

A question that gets asked a lot is ‘are home improvements tax deductible if they improve your property’s energy efficiency, and the answer is yes! You’ll be able to claim tax credit on energy-efficiency improvements to both your home and any rental properties you have. Home improvements such as swapping your old windows for double or triple-pane energy-efficient windows, adding geothermal heat pumps, or installing solar-powered water heaters are all energy-efficient tax-deductible home improvements. 

How To Work Out Your Energy-Efficient Improvement Deductible Taxes?

The number of expenses that are deductible when adding an energy-efficient change to your property will depend on when the work was carried out. You can see what percentage you can claim by checking the current and past Renewable Energy tax credits.

Other Deductible Home Improvements

If you aren’t renting out a property, using parts of your home for work, or adding improvements for medical or energy reasons, you can still save some money on home improvements. Any improvements you make to your property that will increase the resale value are tax-deductible. Types of improvements that add value to a property are things like installing security systems, adding a pool, garage, or driveway.
The cost of these home improvements is added to the tax basis of your home - your basis is the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll receive when you sell your home, but your basis is tax-deductible.
For example, if you purchase a home for $400,000 and decide to spend $50,000 on improvements like a new bathroom and kitchen, your basis will increase from $400,000 to $450,000.
When you sell your home, you will minus your basis from the resale value, and only the profits will be taxed. For example, if you then sell your home for $800,000, you would deduct the $450,000 basis from the resale value, leaving you with $350,000 of taxable profit. If you install home improvements but then remove them later on, the amount you spend on the improvements won’t be added to your basis.
This goes for improving on elements you’ve already improved - for example, replacing fencing you have already replaced before. You could potentially qualify for home sale tax exclusion, which means you wouldn’t have to pay tax on the first $250,000 of your basic amount (or $500,000 if you’re married and filing jointly). To see if you qualify for this tax exclusion, check with the IRS.

How To Keep Track Of Deductible Home Repair And Improvement Expenses

If you’re planning on filing for tax deductions and credit, you need to keep track of your home improvements and repairs. To make sure you have everything you need, you should compile a list of all your repair and improvement expenses that are eligible for deductions. If you’re a landlord or self-employed, you’ll be used to keeping track of your own expenses and working out your income when creating your paystubs - so you shouldn’t find this too confusing. Try out our check stub maker today!
However, if you are struggling to identify which repairs and improvements are eligible, it’s best to speak to a tax professional or accountant.

Conclusion

As you can see, there are a lot of tax deductions and credits that fall under the category of home improvement and repairs. Knowing which ones apply to your situation will help ease the burden on your finances this year! Home improvements and repairs can be eligible for tax deductions - but it all depends on your circumstances and the work carried out!
Now that you know the ins and outs of home repairs and improvements, you'll be able to save on taxes when you decide to make necessary home repairs or well-deserved improvements. Whether these repairs and improvements are a few small fixes like the new paint in your living room or an entire overhaul of your kitchen, there's no denying that this is one way to reduce your annual expenses by taking advantage of tax credits! 
Since you’ve started your journey into tax deductions, you should consider sorting out the rest of your taxes with our Tax Guide For 2021 - we cover everything from W-2 and 1099 forms to how to find the best tax professional - we're here to help you get it all sorted out! We hope our blog post has helped clarify some questions about home improvements and their taxation implications - now feel free to start your renovations!

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Have You Ever Wondered If Home Improvements Are Tax Deductible?
Samantha Clark

A Warrington College of Business graduate, Samantha handles all client relations with our top-tier partners. Read More

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