7 Types of Tax-Deductible Home Improvements

With Tax Day approaching, make sure your clients are taking all the home deductions for which they may qualify.

Nearly a quarter of homeowners(link is external) say they’re planning major renovations this year, and some of those projects may be eligible for a tax deduction. This could help alleviate some of the high costs of homeownership.

Here’s an overview of a few examples of tax-deductible home improvements. As always, your clients should consult a tax professional to understand more about who qualifies for deductions.

Energy-Efficient Upgrades

Homeowners can potentially qualify for an Energy Efficiency Home Improvement Credit(link is external) of up to $3,200 for energy-efficient improvements made after Jan. 1, 2023. The credit for 2024 is 30% of qualified expenses, but it has certain limits depending on the type of improvement.

Energy efficient upgrades can help reduce energy usage and strain on a home’s critical systems. Upgrades can include structural improvements to the home and the installation of new systems. Here are some sample projects:

A home energy audit may be eligible for a tax credit of up to $150. An auditor will help your clients understand where they’re losing energy and identify health and safety issues in their home. A home energy audit could help save up to 30% on energy bills, according to the Department of Energy. To qualify for the credit, the audit must be conducted by a qualified home energy auditor(link is external) or someone who is supervised by a qualified auditor. It also must include a written report prepared and signed by a qualified home energy auditor, and the report must be consistent with industry best practices. Find more information in Notice 2023-59(link is external).
Install ENERGY STAR’s Most Efficient(link is external) exterior windows and skylights for a credit of up to $600 based upon eligibility. Replacing windows can help improve insulation and reduce the need to run the HVAC system.
Install biomass stoves that meet ENERGY STAR’s requirements for up to a $2,000 credit. Biomass stoves must have a thermal efficiency rating of at least 75% to qualify, and costs may include labor to install. Biomass can consist of wood pellets and grasses. Although burning biomass can reduce energy usage, insurance experts recommend following wood-burning best practices(link is external) to help reduce fire and other health risks.

Clean Energy Upgrades

Homeowners could potentially qualify for the Residential Clean Energy Credit(link is external) if they install new renewable energy properties in their homes. There is no dollar limit for this credit except for fuel cell properties ($500 for each half-kilowatt of capacity).

Using clean energy can help lower reliance on traditional utilities and lower usage and bills. Systems like solar panels are generally easy to maintain, typically only requiring regular cleaning to prevent debris buildup. Here are some sample projects:

Installing a solar water heater(link is external) can help reduce strain on a traditional water heater and help prolong its life, depending on the type installed. For example, a two-tank solar water heater preheats water before it reaches a traditional water heater. Water heating is typically the second largest energy expense in any home.
Installing geothermal heat pumps(link is external) can help heat and cool a home more efficiently than traditional heating and cooling systems by transferring heat to the ground rather than generating heat. They tend to be expensive, but according to the Department of Energy, it could potentially see a return on investment for homeowners in five to 10 years depending on available financial incentives.
Battery storage technology helps store excess energy generated from clean energy sources. This gives a home a reliable energy source if the grid goes down.

Historic Home Upgrades

The Federal Historic Rehabilitation Tax Credit(link is external) could apply if homeowners are undergoing a renovation of a historic home. Historic homes can qualify for this tax credit and other grants since many organizations wish to preserve historical buildings. Taking advantage of these can help lower the financial burden of potential repairs while helping to restore a home’s original beauty. Here are some sample projects:

Upgrading or replacing old pipes may qualify for this tax credit and may be necessary to bring the home up to code and help prevent water damage.
Replacing deteriorated parts in the structure of a home, like posts or beams, may qualify for this credit. Replacement should be visually similar to the original and at least equal to the original’s load-bearing capabilities.
Fully replacing a deteriorating set of stairs using the same or compatible substitute material can make a home safer and also may qualify for this tax credit. The new set of stairs should look similar to the original.

Medically Necessary Upgrades

Homeowners could potentially include medically necessary home upgrades as a part of a medical expense deduction(link is external). These include improvements that help make a home more accommodating for a person with a disability, spouse or dependents that live in the home. The amount that can be included in a medical expense deduction depends on how the improvement impacts the home’s value:

If the home’s value increases as a result of the improvement, the medical expense is considered the cost of the improvement minus the increase in home value.
If the home’s value does not increase, it can include the entire cost in the medical expense deduction.

Homeowners can invest in upgrades that can help make their home more accessible and help prevent future maintenance issues (which is especially important if they plan to age in place). For example, lowering kitchen cabinets or installing pull-down shelves can help prevent potential falls and damage when straining for out-of-reach items. Here are some sample projects:

Installing modified smoke detectors and other monitoring systems can help alert those with a disability, like alarms with strobe lights for those who are hard of hearing. Smart monitoring systems, like water leak detectors, can also make it easier to detect issues early in hard-to-reach areas.
Grading, or leveling, the ground can improve accessibility and also help protect a home from water runoff. Grading can help reduce steep slopes and create more accessible pathways for those with mobility challenges. It can also help direct runoff away from a home and prevent standing water.
Bathroom modifications, like grab bars and railings, can help prevent slips and falls. These modifications also can help prevent water splashes that could lead to mold or mildew over time.

Home Office Repairs and Improvements

Homeowners may be eligible to deduct home office repair expenses(link is external) if they have a dedicated part of their home that they regularly use as their main place of business. The amount that can be deducted depends on whether the project impacts the entire home or just the office. Home office improvements are not tax deductible and would be categorized similarly to capital improvements. Here are some sample projects:

If installing a full home security system, homeowners could potentially deduct the cost of maintaining and monitoring the system that relates to the business part of their home.
Repairing damaged outlets and wiring may be tax deductible and, more importantly, a crucial project to help prevent electrical fires and potential damage to devices. Electrical distribution or lighting equipment (which includes wiring and outlets) was the leading cause of home property damage from 2016 to 2020, according to the April 2023 National Fire Protection Association Home Structure Fires Report.
Replacing home office windows with dual or triple-pane windows to help improve insulation and reduce noise also may be eligible. In addition to the tax benefits, homeowners may find it good for resale value, too, since this can help lower the need for cooling and heating and lower the strain on an HVAC system.

Rental Property Repairs

If homeowners rent out a part of their home, they may be able to deduct repair expenses(link is external) from the amount of taxable rental income they receive. Limitations apply, such as if they’re renting a space in their current residence.

Maintaining the parts of their home that they rent can help prevent issues from impacting the rest of their home. For example, issues like water leaks or drafts in one area can lead to bigger issues if left unaddressed. Here are some sample projects:

Repairing leaks in a tenant’s bathroom can help prevent long-term mold and mildew issues. Leaks also could impact a home’s structural integrity if drywall or floor joists are left wet over time.
Addressing air leaks in a tenant’s area can help improve insulation, keep them comfortable and lower the need to cool or heat that part of a home. Updating the weather stripping around windows and doors may also apply.
Routinely checking the air vents in a tenant’s part of the home can improve the chances of catching airflow issues early, including dirty vents or leaky ducts. Improved airflow can help boost indoor air quality and regulate temperature throughout your home.

Capital Improvements

Capital improvements are projects that extend a home’s life, add value or refit a home for new uses. These differ from home repairs, which are part of property maintenance but don’t necessarily add value (like fixing a leak). There are some limitations to the types of eligible improvements. For example, homeowners cannot include the cost of installing carpeting if they later remove it. They also cannot include energy-related improvements if they received subsidies or tax credits for those improvements.

Homeowners can add the value of qualifying capital improvements to the cost basis(link is external) of their home. When they sell their home one day, they may be able to subtract their adjusted cost basis from the sale price. This can help reduce the amount of capital gains taxes they may owe. However, they’ll also need to take into account the tax implications(link is external) of the capital gains from the sale of their home.

Although homeowners won’t see tax benefits from these improvements right away, these projects can help proactively protect a home by getting ahead of potential issues. Here are some sample projects:

Installing a new HVAC system to replace one that’s over 10 to 25 years old(link is external), isn’t running efficiently or is worn beyond repair can help save money and help protect a home. A modern and efficient HVAC system can improve air circulation, maintain temperature control, and help cut down on utility costs in the process.
Installing attic insulation can cost about $1.80 per square foot and can help reduce heating and cooling costs, easing stress on an HVAC system. A better-insulated attic can also help maintain a roof’s temperature and prevent related damage, like the expanding and contracting that can occur with winter ice dams.
Installing water softeners can help reduce calcium and magnesium in the water. This helps reduce buildup in plumbing fixtures and pipes and helps appliances run more efficiently and last longer.

Source: nar.realtor

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