Can you Deduct Home Repairs or Home Improvements on Taxes?

Any area that you can save on your taxes is a good thing. And when it comes to your home, that goes double. Your house is one of (if not the) biggest investments that you’ll ever make. So it makes sense that if there is any way to apply associated costs to your tax bill then you’d want to go for it, especially for things like home repairs, which can be a costly surprise during the year. But can you deduct home repairs on taxes?

There is some good news in this area, but also some bad news. First, the bad news: if you use your home as your personal residence you can’t deduct home repairs on taxes. If your furnace goes bust and you need to call in a pricey repair service, you’re not going to have any recourse come tax time. The good news, though? You can deduct home improvements. Confused? It helps to start by looking at the difference between home repairs and home improvements, and in particular what they help you achieve.

Home Repairs vs. Home Improvements

They sound similar (and are sometimes used interchangeably), but there is actually a pretty stark difference between repairs that you make to your home and improvements.

Home repairs are things that you do to your home to keep it in good condition. For example, fixing a broken window, re-grouting an old bathtub, and dealing with that aforementioned busted furnace. The goal with home repairs is to return your home to its ideal—not to make a substantial improvement on what was already there.

Home improvements, on the other hand, are things that you do to your home to increase its value. Think additions, swimming pools, and energy efficient upgrades. The goal with home improvements it to increase the market value of your property through changes that make it better than it was before.

Of course, sometimes there is overlap, such as when your repair solution is a complete replacement. So if you repair old and cracked windows by replacing them with a completely new set, that’s an improvement. If you repair old and cracked windows by replacing some panes, that’s a repair.

Deducting Home Improvements From Taxes

Alright, so you can’t deduct home repairs on taxes, but you can deduct home improvements. But how?

Unfortunately, deducting home improvements isn’t quite as simple as itemizing them on your Schedule A tax form. That’s because, while they can absolutely serve to lower your taxes, that benefit kicks in when you sell your home—not on a year to year basis.

It works like this: home improvements are considered capital improvements. This means that the money you spend on them qualifies as something that increases the value of your home, in turn increasing the capital gain you’ll make on it when you sell.

When you make a capital improvement, you add the amount of added value to your tax basis, which is the amount deducted from the sale price of your home that determines your profit on it. This is non-taxable equity, meaning that any money you spend on capital improvements and make back in profit is money that goes into your pockets—and not to the IRS. So while it’s not a deduction, it is a big tax savings later on.

One (good) caveat to this rule is when you make improvements in your home’s energy efficiency. The nonbusiness energy property credit provides homeowners with a 30% tax credit for the cost and installation of certain energy upgrades, including solar panels for home electricity, solar-powered water heaters, and geothermal heat pumps. If you do make any of these improvements, be sure to keep careful accounting of your expenditures.

Tax Deductible Home Improvements

When it comes to which home improvements are tax deductible, it’s less about specific improvements and more about what brings the most added value to your property. We’ve covered this before, but just in case you missed it, here’s an overview of the six biggest home value drivers:

1. Upscale garage door replacement
2. Manufactured stone veneer on home exterior
3. Wood deck addition
4. Kitchen upgrades (minor and major)
5. Siding and window replacements
6. Bathroom remodels

As you’ve probably noticed, a majority of the most valuable home improvements are centered on the exterior of your property. What makes these improvements such value drivers is that they have the biggest returns—meaning you recoup the most amount of money in direct comparison to what you spend.

But for tax purposes, plenty of other upgrades will serve to increase your capital improvements, including upgraded appliances and home additions. You might not get quite as big of a return, but you will add to the pool of profit that the IRS can’t touch.

What About Other Home Related Deductions?

By now we’ve covered the basics, such as the fact that you unfortunately can’t usually deduct home repairs on taxes and the what and how of deducting any home improvements that you make. These aren’t the only home-based expenses related to your taxes, though. There are two other major areas related to your home that can have a big effect on what you owe to the feds—including when and if you make repairs on them.

The home office deduction. If you work from home, then you’re hopefully already familiar with the home office deduction. This deduction allows you to deduct the expense of the portion of your home that you use for conducting business, provided that it is your principal place of business, and not just somewhere that you occasionally go to do some work.

If you make repairs to a qualifying home office—for example, if you fix the wiring on a burned out light fixture—that repair is deductible as a business expense. As it stands, you can deduct 100% of the money you spend on making repairs to your home office, though again, to do so you must meet the standard qualifications for the home office deduction.

The home rental deduction. If you rent out a portion of your home then you are able to take advantage of all of the tax deductions available to landlords, and this includes home repair deductions. This is true even if the repairs you make are for the benefit of your entire home, and not just the part of your home that you rent out.

These deductions can get a little bit tricky, since it’s important that any repairs you make don’t actually qualify as home improvements. Here’s a good explainer on maximizing your repair deductions as a landlord, which includes tips like making sure to repair and not replace, and to only repair items to their previous condition.

Making Sure You Get Your Tax Break

Whether it’s a capital improvement or a home office or rental based tax deduction, you want to make sure you do things right in order to get your money back. And the best way to do that is to make sure that you safely store all receipts related to associated expenditures, and that you keep them organized so you can easily pull them out when you need them. This is especially true for capital improvement gains, since it may be many years before you get the tax benefit. The better records you keep, the easier time you’ll have when it comes to qualifying your deductions with the IRS.