The general tax rule states that money spent on home improvements cannot be deducted on your annual tax return. However, like all government rules, there are exceptions and under certain circumstances you may be able to take at least a partial deduction or get a tax credit for improvements you have made to your house.
Recover Costs When You Sell
The tax rules view money spent on home improvement as personal expenditures, and this type of spending does not fall into any tax deduction category. In the longer term, the money you spend on improving and upgrading your personal home can be added to the cost basis and possibly reduce any capital gains tax when you sell. For example, if you paid $100,000 for your home, put in $25,000 worth of upgrades and then sell the home for $175,000 ten years later, the taxable gain would be the difference between the sale price and your original cost plus the cost of improvements, or $50,000. Be aware, however, that gains on the sale of a home could fall under the homeownership tax exclusion rule and you would not realize a tax benefit from the cost of home upgrades. Home improvements on rental properties you own are tax deductible.
Energy-Efficiency Tax Credits
You can apply for a tax credit on your federal tax return if you upgrade your home by replacing certain items with more energy efficient alternatives.The tax credits are either a flat amount ranging from $50 to $300 or 10 percent of the cost up to $500, with the specific credit based on the type of energy efficient upgrade. The products covered by these tax credits are biomass stoves, an advanced main air conditioning and furnace fan, insulation, energy efficient roofing, water heaters, and windows and doors. These credits were available at the time of publication in 2013.
Renewable Energy Tax Credits
A tax credit of 30 percent of the cost is available if you buy and install certain types of home renewable energy generators. A geothermal heat pump, small wind turbine or solar energy system can be installed on either a primary residence or second home to qualify for the tax credit. A residential fuel cell also is eligible for the 30 percent credit, but only if installed on a primary residence. As of the time of publication, these tax credits are available on renewable energy upgrades installed through the end of 2016.
Your Home is Not Just a Home
Home improvements can become tax deductible expenses if you use part of the house as a home office or rent out some of your rooms. In this case, any upgrades to make the home office usable or the rooms rentable become business expenses. However, those improvements become depreciable expenses, which means you deduct the cost over a period of years. The tax rules will define the number of years over which you can depreciate and write off the improvements.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.