It’s always gratifying to get a tax break for spending money on something, and there are indeed some tax advantages to be had in improving your home so you can sell it. They’re technically not tax deductions, however, except in isolated circumstances. And there’s a significant tax difference between home improvements and home repairs. The latter doesn’t impress the Internal Revenue Service much at all.
The IRS doesn’t publish an exact list of home improvements that are tax deductible, but it defines a home improvement as something that:
- Significantly increases the property’s value
- Increases its useful life
- Gives it a new or additional use or purpose
What Kind of Home Improvements Are Tax Deductible?
There are no home improvement tax deductions in 2018, at least not if the property is your personal residence and serves no other purpose, such as because you claim a home office. You can’t shave the cost of improvements dollar for dollar off your taxable income, but this doesn’t necessarily mean that they can’t possibly save you tax dollars in other ways.
The Effect on Capital Gains Tax
There are income taxes and then there are capital gains taxes. The latter is a tax on any profit you realize when you sell an asset for more than you paid for it. Your profit is the difference between the sales price and your tax basis, and your tax basis isn’t just what you paid for your home. It also includes things like home improvements.
The greater your basis, the less your capital gain. You would have a taxable capital gain of $50,000 if you purchased your home for $200,000, invested $50,000 in improvements, and sold it for $300,000. Your gain would be twice that, $100,000, if you hadn’t made those improvements. That’s $50,000 less you’d have to pay capital gains tax on.
There’s a catch or two, of course. If you should “undo” an improvement for some reason, such as by filling in that in-ground pool you decided you didn’t want after all, you can’t add its cost to your basis. And while you can include the cost of labor, you can’t use the cost of your own time for improvements you might make yourself.
Some Capital Gains Aren’t Taxed Anyway
Cost basis is less important for some taxpayers than for others because the IRS offers a home sale tax exclusion. If you meet certain rules, the first $250,000 of profit on the sale of your home is tax-free if you’re single, and it’s $500,000 if you’re married and file a joint return. You wouldn’t owe capital gains tax anyway on that sale for $300,000 unless you failed to qualify for the exclusion. One rule is that you must have lived in and owned your home for at least two of the last five years.
If You Borrow Money for Improvements
It’s possible that you could also get a small tax break if you take out a home equity loan to pay for those improvements. Mortgage interest is tax deductible, but only if you itemize, and only up to $750,000 of indebtedness. It used to be that you could deduct interest on home equity loans you took out for any reason, but as of 2018, you can only do so if you use the funds to “buy, build or substantially improve” your home, according to the IRS.
A Home Improvement Tax Credit in 2018 and 2019
Some home improvements qualify for a tax credit, which isn’t the same as a deduction but it can provide a significant tax break nonetheless. Credits come directly off what you owe the IRS.
The Residential Renewable Energy Tax Credit covers the cost of installation of geothermal, wind, solar and fuel-cell technology. Unfortunately, another credit – the Nonbusiness Energy Property Tax Credit – expired at the end of 2017.
How to Document Home Improvements for Taxes
Of course, you’ll want to keep track of all this so you have a record of how much you spent when you get around to selling your home and if you find that you need to whittle away at that profit for capital gains tax purposes. This doesn’t have to be particularly challenging. Start a file the first time you pay to upgrade your hot water heater and drop the receipt in there. Add to it whenever you do something new. Just be sure to keep the file in a safe, fireproof place. Or take pictures of your receipts and maintain a file on your computer with a backup in the cloud or on a flash drive.
- NOLO: What Home Improvements Are Tax Deductible?
- TurboTax: Home Improvements and Your Taxes
- TurboTax: Federal Tax Deductions for Home Renovations
- H&R Block: Question About Home Renovation Tax Credit
- IRS: Publication 530: Tax Information for Homeowners
- IRS: Publication 936 (2018), Home Mortgage Interest Deduction
- TurboTax: Energy Tax Credit: Which Home Improvements Qualify?
- IRS. "Publication 523 Cat. No. 15044W: Selling Your Home: For Use in Preparing 2018 Returns," Page 2. Accessed March 16, 2020.
- IRS. "Publication 523 Cat. No. 15044W: Selling Your Home: For Use in Preparing 1997 Returns," Page 2. Accessed March 16, 2020.
- Congressional Budget Office. "The Distribution of Asset Holdings and Capital Gains," Page 24. Accessed March 16, 2020.
- IRS. "Publication 523 Cat. No. 15044W: Selling Your Home: For Use in Preparing 2018 Returns," Page 3. Accessed March 16, 2020.
- IRS. "Publication 523 Cat. No. 15044W: Selling Your Home: For Use in Preparing 2018 Returns," Pages 3-4. Accessed March 16, 2020.
- IRS. "Publication 523 Cat. No. 15044W: Selling Your Home: For Use in Preparing 2018 Returns," Pages 7-9. Accessed March 16, 2020.
- IRS. "Publication 17 Catalog Number 10311G: For Use in Preparing 2019 Returns," Pages 115-116. Accessed March 16, 2020.
- IRS. "Publication 544 Cat. No. 15074K: Sales and Other Dispositions of Assets: For Use in Preparing 2019 Returns," Page 35. Accessed March 16, 2020.
- IRS. "Topic No. 409 Capital Gains and Losses." Accessed March 16, 2020.
- Congressional Budget Office. "The Distribution of Asset Holdings and Capital Gains," Page 1. Accessed March 16, 2020.
- Congressional Budget Office. "The Distribution of Asset Holdings and Capital Gains," Pages 2-3. Accessed March 16, 2020.
- The IRS refers to the home's realized amount as the selling price minus expenses. The IRS allows you to deduct expenses from the sale of the home including legals fees and commissions.
- You may not have documentation or proof of a renovation, but you may still add legitimate home improvements to the original cost basis of the home.
- The IRS will allow you to exclude up to $250,000 in gains from your income or $500,000 if you file jointly with your spouse.
- Depending on the realized amount from the sale, you may not be required to document the sale of the home on your taxes if you fall within the IRS excluded amount.
- The IRS gives strict guidelines regarding the definition of what defines a primary home. You must have lived in and used the home in at least two of the five years preceding the home's sale in order to take advantage of the gain exclusions.
- If you have excluded gain from another home within 2 years of the current sale, the IRS will not allow you to use the gains exclusion.
- Do not add routine maintenance costs or repairs. The IRS states home improvements must "add to the value of your home, prolong its useful life, or adapt it to new uses."
- Don't include home improvements that have been replaced or removed.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.