Understanding the Tax Implications of Home Improvements

Home improvements can make your living space more comfortable, increase the value of your home,
and provide potential tax benefits. However, not all home improvements qualify for tax breaks, so it’s
essential to understand the difference between deductible expenses and those that impact taxes only
when you sell your home.

1. Home Improvements vs. Repairs
The IRS generally distinguishes between improvements (enhancements that add value to your
home, such as remodeling a kitchen or adding a deck) and repairs (routine fixes to maintain the
property, like patching a roof or fixing a leaky faucet). Most repairs are not tax-deductible, but
improvements may impact your tax situation in the long term.

2. Increasing Your Home’s Basis
Home improvements can increase the basis of your home. The "basis" is your original
investment in the property, which is used to calculate capital gains when you sell. By adding the
cost of improvements to your home’s basis, you can reduce your taxable gain if you sell the
property for a profit. This can be especially valuable if you sell your home for a substantial gain
and exceed the capital gains exclusion limits ($250,000 for individuals, $500,000 for married
couples).

3. Medical and Energy-Efficient Improvements
Certain improvements may qualify for tax credits or deductions. For example, energy-efficient
upgrades like solar panels, energy-efficient windows, or insulation can qualify for federal tax
credits. Additionally, if improvements are made for medical reasons—like installing ramps or
widening doorways for accessibility—these costs might be deductible as medical expenses.

4. Rental or Home Office Deductions
If you use part of your home for business or rent out a portion of your property, improvements
to those areas may be tax-deductible. This can include renovations to a home office or a rental
unit.

In summary, while most home improvements don’t offer immediate tax deductions, many can reduce
your taxable gains when you sell your home. Certain energy-efficient or medical-related improvements
may also provide immediate tax benefits, so be sure to consult a tax professional for personal guidance.

Shelley Girardin-Klatz