In most cases, the Internal Revenue Service does not allow tax deductions for home improvements you make to your personal residence, but you may qualify to deduct costs as home office or partial rental property expenses. Some of the interest you pay on a home improvement loan may be deductible as well. You may also qualify for federal tax credits when you make improvements to your home that save energy.
Consider Also: Home Improvement & Tax Deductions: What's Deductible and What's Not
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Home Office and Partial Rental Offers Tax Advantages
If you have a business and use part of your home as an office, you can deduct the full cost of the improvements you make to your office by depreciating the cost as a business expense. If you make major improvements or upgrades to your entire home, you can only depreciate costs for the portion of your home you use exclusively for business. Add the remaining cost of a capital improvement to your tax basis.
Similarly, you can deduct or depreciate improvement expenses related to renting out part of your home. While you can deduct the full cost of repairs to the rental portion, you must depreciate the applicable portion of major improvements over time.
Consider Also: Guide to Home Office Deductions
Major Improvements Qualify for Tax Benefits
Making routine repairs such as fixing minor plumbing leaks or repainting walls doesn't qualify for a mortgage interest deduction, but taking out a home equity loan to make major home improvements does. According to IRS Publication 936,%2C%20and%20meet%20other%20requirements.) the interest on a HELOC is treated similar to the interest on a first mortgage loan when it comes to qualifying for tax deductions.
Examples of capital home improvements for which you can deduct home improvement loan interest include building a garage, putting on a new roof, or upgrading the home's heating and air-conditioning systems.
Improvements Add to Tax Basis
Although you can't deduct the cost of home improvements to your personal residence on your taxes, except in certain circumstances, improvements that add significant value to your home and prolong its useful life increase your home's tax basis. Your tax basis includes the price you paid for the house, certain closing costs you paid to buy the home, and capital improvements you make while you own the property.
Including the cost of major renovations in the property's tax basis can lower the amount of capital gains tax you will owe when you sell the home if you don't qualify for the federal government's home sale tax exclusion.
Energy Efficient Improvements: Tax Credits
You may qualify for home energy tax credits if you make qualifying energy efficient home improvements, such as adding insulation to your home, installing an energy efficient heating and cooling system, or replacing exterior doors and windows. The Residential Energy Property Credit allows you to claim 10 percent of the cost of these improvements for the 2021 tax year, though it's expiring.
Another credit named by the IRS, the Residential Energy Efficient Property Credit, allows you to claim a credit equal to 26 percent (for 2019-2022) of the cost of qualified alternative energy equipment, including geothermal heat pumps, solar hot water heaters, and wind turbines.