What Home Improvement Projects Can Actually be Tax Deductions in 2023

Table of Contents

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.