For any renovation or repair to qualify for a tax deduction, the work must qualify under IRS rules as a home (or capital) improvement. Examples of projects that may qualify include new additions, new roofs, whole room renovations, new siding, new heating or air conditioning systems and certain interior renovations such as new floors. In other words, the improvement must meet one of these requirements:
- Be permanent.
- Prolong the property’s useful life.
- Adapt the property to new uses.
- Make the property more valuable.
However, capital improvements are not eligible for tax deductions until the home is sold. Therefore, it is imperative to keep all documentation of the renovation or remodel, including plans and receipts.
It’s also important to understand that according to the IRS not all changes to a house are renovations. Even if you spent a considerable amount of money, renovations that have a life expectancy of less than one year or that can be removed from the home are considered repairs. Examples of repairs include installing new kitchen cabinets, replacing broken windows, fixing leaks and updating faucets or other hardware.
A further complication is that renovations to your nonprimary residence or to a rental property that you own may be subject to different rules.
Other tax benefits
Even if your upgrades do not qualify as renovations for tax deductions, work you do on your home may be eligible for other federal or state tax credits and deductions. State rules vary, so be sure to consult an expert where you live. Federal options include the following:
- Home office upgrades. If there is a space in your house that you use exclusively and regularly for business, you may be able to deduct any repairs or improvements to that portion of your house.
- Home improvements for medical care. If you install ramps to or handrails in your house to provide access for someone who lives in the house, these upgrades may qualify for a deduction.
- Energy efficiency tax credits. In 2024, the federal Energy Efficient Home Improvement Credit may provide a credit of 30% on certain qualified energy efficiency improvements, up to a total of $3,200. The Residential Clean Energy Credit may provide a credit of 30% of the cost of new, qualified clean energy products installed in your home. Both credits come with important rules and limits.
- Improvements made using a loan. Some federal loans and lines of credit allow you to deduct the cost of interest on the loan on your taxes.
Finally, keep in mind that tax rules can change, often with little notice, so be sure to work with a professional to make sure you are up on the latest tax breaks.
