Are Home Improvements Tax Deductible?

By Ygrene on February 13, 2020
Disclaimer: Ygrene Energy Fund does not provide tax advice. The tax information contained within this website is provided for informational purposes only and is not intended to substitute for expert advice from a professional tax/financial planner or the Internal Revenue Service (IRS). Property owner(s) should seek professional tax advice if he or she has questions regarding tax credits, tax deductibility, or of other tax impacts on the PACE assessment or assessment contract.

Which Home Improvements and Repairs May be Tax Deductible?

With tax season fast-approaching, there’s no better time to begin looking for smart ways to earn the highest possible return. Everyone loves to catch a break during tax season, but few people know the home improvement projects that could qualify as tax-deductible. Installing solar panels for your home or building out a home office are just a couple of the many household upgrades which may be eligible under IRS rules.

So, which home improvements may be tax-deductible? What is the difference between repairs and improvements? Get some insight into these questions and get the most out of your home improvement.

Improvements vs. repairs: what’s the difference?

What is the home office deduction?

Improvements vs. repairs: what’s the difference?

They may sound the same, but home improvements and home repairs have a different meaning to the IRS.

Home repairs keep something in good, working condition, such as patching a broken window or replacing broken roof shingles. The goal of home repairs are to restore your home to its original condition rather than enhancing with new features but unless you qualify for the home office tax deduction, the majority of home repairs may not be not eligible as tax-deductible.

Home improvements may increase the value of your property, such as building an in-ground pool or installing a residential wind turbine. Compared to simple home repairs, improvements have a far greater impact on the value of your property and are calculated differently by the IRS.

What is the home office deduction?

The modern entrepreneur doesn’t need to have a multi-story office space to own and operate their own business. Today, more people are setting up shop within the comfort of their homes. If you use a designated space in your home for your business, you may be eligible to claim the home office deduction on your annual tax return.

The home office deduction is designed to grant home-based workers a number of tax write-offs. However, per the IRS’ standards, specific criteria must apply to your particular situation. The qualifying conditions are broken down into two primary categories: regular and exclusive use and principal place of business.

  • Regular and exclusive use: This categorization applies to those using an in-home space that is used exclusively for business dealings. It is important to note that double-use spaces, such as a home office that also doubles as an entertainment room. There are two distinct exceptions to the exclusivity rule.
    • The home office deduction may still apply if you provide daycare services for children, elderly, or handicapped individuals in the designated business-space. You will need to provide an official license or certification as a daycare center under state law per the IRS’ regulations to fully qualify.
    • If you use the designated space for business-associated stock or inventory storage.
  • Principal place of business: While your home office space doesn’t have to be the only place you complete your business dealings, it must be your principal place of business. This means space must be used exclusively and regularly for administrative or management tasks. This includes everything from scheduling appointments, bookkeeping, billing customers, and more.

Deducting the cost of home office repairs and improvements can be tricky, so you should consider working out numbers with a tax professional before finalizing your tax return to avoid making any mathematical or categorical mistakes. It’s also important to note that while some home office repairs and improvements may be fully deductible, others may be only partially deductible.

What home improvements may be tax-deductible?

Energy-efficient installations

The current tax code is home to a select few energy-efficient federal tax credits purely intended to benefit those who upgrade their homes to eco-friendly alternatives. And fortunately for those who are making the leap toward green-efficiency, there are a number of solar energy improvements that could qualify as tax-deductible. 

In 2020, switching to a solar energy system on a new or existing home may still earn you a 26% tax credit on the total installation cost. The Solar Investment tax credit is designed to incentivize homeowners to upgrade to green, renewable energy resources which reduces nationwide dependence on fossil fuel-generate electricity. However, since these rules are constantly changing, you will want to work with your tax professional to ensure you are relying on the most current rules and calculations when claiming tax credits.

Because the Solar Investment tax credit is a credit, rather than a deduction, you receive a dollar-for-dollar reduction on your final tax bill that is equal to the 30% incurred cost of your home improvement project. As long as you own and operate a solar energy system, you may claim the Solar Investment tax credit on your return. It is important to remember that if you signed a lease or opted for a PACE financing payment solution, you are not the lawful owner of the solar system, therefore you may not rightfully claim the credit.

Common eligible renewable and energy-efficient home improvements include:

Handicap and medical care modifications

Money spent on home improvements that increase accessibility in your home may also be eligible for tax deductions. According to IRS, you may qualify to deduct the sum of project expenses that amount to more than 7.5% of your adjusted gross income, as long as the primary purpose is to provide care and accessibility to yourself, a spouse, or a dependent.

Common eligible medical care home improvements include:

  • Ramp installation

  • Handrail and grab bar fixtures

  • Electrical outlet modification

  • Widening hallways and doorways

  • Porch and stairway lift installation

Home office improvements

You may qualify for the IRS Home Office Deduction Repairs and improvements made to your workspace may be partially deductible if you are directly impacting your workspace, like replacing an office window, or fully tax-deductible, if benefiting your entire home, like a heating system repair.

Examples of eligible home office improvements include:

  • Paint jobs

  • Equipment upgrades

  • Electric repairs

  • Updating fire alarms, smoke detectors, and other security alarm systems

Rental property renovations

If you own a rental property, identifying your improvements from your repairs can be challenging but is necessary. The cost of repairs incurred to maintain your rental property may be deducted from your annual taxable income, however, some repairs that classify as improvements may not be eligible for the full deduction. 

Repairs must be vital to the upkeep of a property to be fully deductible. Improvements, on the other hand, must add value to the rental property rather than mere maintenance. Improvements depreciate over time, which means the costs are deducted in concurrence with the depreciation of the rental home.

Common eligible rental property repairs and improvements include:

  • Patching a leaky roof

  • Replacing malfunctioning security systems

  • Household appliance repairs

  • Swapping damaged air vent registers and filters

  • Upgrading to energy-efficient doors and windows

Whether you’re putting the finishing touches on your new solar-powered home or restoring an existing home office space to energize your productivity levels, there are many ways the IRS can pay you back for your qualified home improvements and repairs. It just takes a bit of research, careful record-keeping, diligent tax-filing and consultation with a tax professional to reap the fruitful benefits.