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What Home Improvement Projects Can Actually be Tax Deductions in 2023

Home renovations can be a great way to update and improve your living space, but did you know that some of the costs can also be written off on your taxes? The IRS allows homeowners to deduct certain home improvement expenses, as long as they meet certain criteria. If you made home improvements in 2022, here’s what you need to know in order to prepare for filing taxes this year and which projects are eligible.

Home office improvements

One way to deduct home renovation costs is through the home office deduction. If you have a dedicated space in your home that is used exclusively for business, you may be able to write off a portion of the costs associated with renovating that space. This includes things like painting, flooring, and even building a new room. There are a few stipulations to this, however.

  1. The IRS states that “The taxpayer needs to use a portion of the home exclusively for conducting business on a regular basis and the home must be the taxpayer’s principal place of business.”
  2. While some of us have shifted to remote work after COVID-19, the IRS reiterated that these deductions are only eligible for those who are independent contractors or those self-employed, not if you work from home but receive a W2 from an employer.

Energy-efficient improvements

Another way to write off home renovation costs is through energy-efficient upgrades. In August of 2022, the White House issued the Inflation Reduction Act to advance environmental justice and help working families. Because of this, homeowners will earn benefits for investing in greener energy systems and other upgrades. The IRS will offer a tax credit for certain energy-efficient improvements, such as installing:

  • New windows
  • Insulation
  • Solar energy system
  • Energy efficient HVAC

Home improvements to increase resale value

Additionally, if you decide to sell your home, any renovation costs can be added to the basis of the home, which will lower the overall capital gains tax on the sale of the property. Capital gains taxes are imposed on the profit made from the sale of a property, and the tax rate is determined by the length of time the property was owned.

For properties that have been owned for less than a year, the tax rate is the same as the individual’s income tax rate. For properties that have been owned for more than a year, the tax rate is typically lower, at 15%. One way to reduce or avoid capital gains taxes is by making home improvement projects that increase the value of your property. This is because the cost of these improvements can be added to the original cost of the property, thereby reducing the overall profit made from the sale.

For example, if you purchased a property for $300,000 and made $50,000 worth of home improvements, your cost basis (the original cost of the property) would be $350,000. If you then sold the property for $500,000, your capital gain would be $150,000, instead of $200,000 without the home improvement.

Home improvements for medical reasons

Home improvements that are made for medical care may be tax deductible. These expenses must be for the purpose of medical care, and the improvements must be used primarily for medical care.

  • Expanding hallways and doorways
  • Lowering or changing kitchen cabinets
  • Building entrance and exit ramps
  • Installing support rails in bathrooms
  • Installing handrails
  • Modifying fire alarms and smoke detectors

However, it’s important to note that in order to claim a tax deduction for these expenses, the individual must itemize their deductions on their tax return, and the medical expenses must exceed a certain percentage of the individual’s adjusted gross income. It’s always best to consult with a tax professional or the IRS for specific guidance on tax deductions related to home improvements for medical care.

So you learned you’re eligible, now what?

It’s important to note that in order to claim these deductions or credits, you’ll need to keep detailed records of the renovation costs, including receipts and invoices. It’s also a good idea to consult with a tax professional, as the rules and regulations surrounding home renovation tax deductions can be complex.

In conclusion, home renovations can not only improve your living space, but they can also offer potential tax savings. Be sure to do your research and consult with a tax professional to understand what deductions or credits you may qualify for. Lastly, if you’ve recently bought a home and haven’t made any renovations yet, start to think about which ones you should make in 2023. Especially if you are worried about your finances but need to make necessary improvements to your new house, it’s good to keep this in mind for future write-offs.

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How to Budget Your Home Renovation Project

Renovating your home can be a thrilling and rewarding experience, but it can also be a major financial undertaking. That’s why it’s important to budget carefully before starting any home renovation project. In this blog post, we’ll go over some tips and best practices for budgeting for a home renovation project.

Determine your budget:

The first step in budgeting for a home renovation is to determine how much you can afford to spend. Take a close look at your financial situation and consider factors like your income, savings, and debts. You may also want to consider getting a loan or using a home equity line of credit to help finance the renovation.

Make a list of your needs and wants:

Once you have a rough idea of your budget, it’s time to make a list of your needs and wants. Your needs are the things that are essential to the project, such as replacing a leaky roof or updating an outdated electrical system. Your wants are the things that would be nice to have, but are not necessary, like a new Jacuzzi tub or a custom-built entertainment center. Prioritizing your list will help you allocate your budget more effectively.

Get quotes from contractors:

It’s important to get quotes from multiple contractors to get a sense of how much the renovation will cost. Be sure to get detailed estimates that break down the cost of materials and labor. Don’t be afraid to negotiate with contractors to get the best deal. Lucky for you, Dibbs has a built-in process for receiving multiple quotes from contractors. All you have to do is share your project and they’ll start bidding.

Set aside a contingency fund:

No matter how carefully you plan, there will always be unexpected expenses that arise during a renovation project. That’s why it’s a good idea to set aside a contingency fund to cover these unexpected costs. A good rule of thumb is to set aside about 10-20% of your total budget for contingencies.

Stay on track:

Once you’ve established your budget and made a plan, it’s important to stick to it. Keep track of your expenses and be mindful of any changes that could affect your budget. It can be tempting to add on extra features or upgrade materials as the project progresses, but try to resist the urge to overspend.

By following these tips and staying organized, you can successfully budget for your home renovation project and turn your dream home into a reality.

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Which Home Renovations You Should Do First

 

As a homeowner, it can be tempting to want to tackle every renovation project at once. However, it’s important to prioritize your renovations in order to get the most bang for your buck. Here are some tips for deciding which home renovations you should tackle first:

 

Focus on necessary repairs:

 

If your home is in need of repairs that are essential to the safety and functionality of the house, these should take priority. This includes things like fixing a leaky roof, replacing faulty electrical wiring, or addressing structural issues.

 

Make energy-efficient improvements:

 

Upgrading your home’s insulation, windows, and heating and cooling systems can not only make your home more comfortable but can also save you money on energy costs in the long run. 

By using energy-efficient appliances and making your home more energy efficient, you can significantly cut down on the amount of energy you use, which can lead to lower energy bills.

In addition to saving money on your energy bills, these home improvements are also good for the environment. By using less energy, you are helping to reduce your carbon footprint and decrease the demand for non-renewable energy sources.

And lastly, making energy-efficient improvements to your home can increase its value, making it more attractive to potential buyers. You can learn more about how to make energy-efficient improvements here.

 

Update your kitchen and bathrooms:

 

These are two of the most frequently used rooms in the house, and they also tend to have the highest return on investment. Even small updates like new countertops or faucets can make a big difference. These updates can not only improve the aesthetics of your home, but also increase its functionality and convenience. Additionally, updating your kitchen and bathrooms is also a smart investment, as these updates can increase the value of your home and make it more attractive to potential buyers. Overall, updating your kitchen and bathrooms is a great way to improve the look and feel of your home, while also increasing its value and functionality.

 

Consider the future:

If you are planning on selling your home in the near future, it’s a good idea to focus on renovations that will appeal to a wide range of buyers. This might include things like a fresh coat of paint, new flooring, or updating the landscaping. Ultimately, the most important thing is to approach home renovations with a plan in mind. By prioritizing your projects, you can ensure that your renovations are both practical and cost-effective.

Start improving your home’s resale value by making minor upgrades today!

Home improvement projects like roof replacement, upgrading insulation, or refinishing your flooring, will ensure that when you’re ready to sell, you’re getting a good return on your investment. Click on your state to get started.