Are Home Improvements Tax Deductible? (2023 Guide)

Two types of home improvements typically offer some tax benefits: energy-efficient upgrades and medically necessary renovations.

Energy-Efficient Upgrades

Energy-efficient upgrades may offer substantial tax credits for improvements or renovations to an existing home. Qualifying home renovations may include upgrading exterior doors, windows, skylights and insulation materials or replacing central air conditioners, water heaters or furnaces with more energy-efficient versions. 

For these types of upgrades, the IRS offers a tax credit called the Energy Efficient Home Improvement Credit. A tax credit differs from a tax deduction in that it reduces the amount of taxes you owe dollar-for-dollar. For example, if you owe $2,000 in tax, but have a $1,200 tax credit, your tax bill would be reduced to $800. For that reason, tax credits can often be more advantageous than tax deductions.

It should be noted that these credits do not extend to new home construction.

Medically Necessary Renovations

Home renovations that are medically necessary may qualify for a medical expense deduction. If you need to make changes to your home to create a functional space for you, your spouse or a dependent due to medical issues, you may be able to deduct the cost or part of the cost of the renovations from your taxable income.

Below are some of the medically necessary home improvements the IRS allows you to deduct:

• Installing entrance or exit ramps.
• Widening doorways.
• Widening or modifying hallways and interior doorways.
• Adding railings, support bars or other modifications to bathrooms.
• Lowering kitchen cabinets.
• Moving electrical outlets and fixtures.
• Installing porch lifts and other forms of lifts.
• Modifying fire alarms and smoke detectors.
• Altering stairways.
• Installing handrails or grab bars.
• Changing hardware on doors.
• Grading the property to provide access to the residence.

Major home renovations that don’t qualify for these specific tax savings may still be helpful when you sell your property. Per the IRS, “improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.” Adding these improvements to your basis calculations can reduce your tax liability once you’ve sold the property.

To determine whether an expense is tax deductible, you’ll need to distinguish between home renovations and general maintenance. Regular home maintenance is not tax deductible. This includes routine fixes to maintain the property’s current condition, such as painting, replacing old carpet and fixing leaky faucets. 

Renovations, on the other hand, are substantial changes that enhance the home’s value or purpose for the space. Some home renovations may qualify for tax credits or tax deductions through specific IRS rules, while remodels made purely for aesthetic or architectural reasons are not eligible for tax benefits.

Depending on the type of home improvement tax savings you qualify for, you will need to complete the specific form and calculations per the IRS. We have created a step-by-step guide for those wanting to claim home improvements on their taxes.

Step 1: Document Expenses and Keep Records

• Keep detailed records: From the moment you start planning your home improvement project, start keeping detailed records. These should include all receipts, invoices and contracts related to the work. Having a dedicated folder for documents or scanning them into a digital file can help you stay organized.
• Take before and after photos: Photograph the areas of your home that will undergo improvements both before and after the work has been completed. Visual records can help document the changes made to your property.
• Maintain a timeline log: Create a document where you record project details, expenses and any changes that enhance your property’s value. This document can include notes on the materials used, labor costs and the dates of each phase of the project.

Step 2: Filing the Appropriate Tax Forms

• Determine eligibility: Review the IRS guidelines to ensure that your home improvement project qualifies for a tax deduction. Remember, not all improvements are eligible. Qualifying improvements typically include increasing your home’s energy efficiency, making it more accessible for medical reasons or adding significant value to the property.
• Itemize your deductions: To claim home improvement tax deductions, you generally need to itemize your deductions rather than taking the standard deduction. Make sure that you understand the process of itemizing and talk with your tax advisor to see if it makes financial sense for your personal tax situation. 
• Complete IRS Form 5695: To claim a deduction for energy-efficient home improvements, use IRS Form 5695. This form allows you to calculate the Energy Efficient Home Improvement Credit. Examples of eligible improvements include solar panels, energy-efficient windows or upgraded heating and cooling systems.

Step 3: Meeting IRS Criteria for Deductions

• Follow IRS guidelines: Check that your home improvement project aligns with IRS guidelines for eligible improvements. For example, energy-efficient improvements must meet specific energy-saving standards, while medical renovations must be deemed necessary by a medical professional.
• Maintain ownership: Typically, you must own and live in the home that you are improving. In some cases, rental properties may qualify, but the criteria can be stricter.

Tips to know

Additionally, here are some practical tips and insights on maximizing tax deductions when it comes to home renovations. 

1. Consult a tax professional: For complex home improvement projects, consulting a tax professional can help you navigate the intricacies of the tax code and allowable deductions, as well as help you maximize the tax benefits.
2. Stay up to date: Keep in mind that the tax laws and deductions can change from year to year. Check the most recent IRS guidelines to stay up to date on the latest regulations. Most items qualify in the year they are installed, not purchased. 
3. Keep organized records: Staying organized throughout the process is crucial. Efficient record-keeping not only helps with your tax deductions but simplifies future home sales, inspections and insurance claims.
4. Know the deduction limits: Some deductions have yearly and/or lifetime limits. Understanding the maximum amount you can claim for specific improvements can help you plan your construction to be the most cost-effective. For instance, the Energy Efficient Home Improvement Credit has dollar limits based on the type of improvement.

Home renovations can require a significant amount of cash to complete the project. A home improvement loan can provide you with the means to improve the quality of your living space with various home projects. The term home improvement loan typically refers to an unsecured personal loan. To qualify for a home improvement loan, lenders will review your income, employment and creditworthiness. 

One benefit of home improvement loans is that they are extremely flexible and can be used for any type of home project. Unsecured personal loans don’t require collateral, so you aren’t putting your home or other assets at risk if you are not able to fulfill the loan. However, because they are based on income and creditworthiness, a personal loan may be challenging to obtain, especially if you’re rebuilding your credit or are in between jobs. These loans can also be costly.

A home improvement loan or personal loan isn’t the only option when you need some cash for renovations. Other options to finance home renovations may be using cash savings, a home equity line of credit, a home equity loan or government grants.

Cash Savings

Using your cash savings is an attractive option — especially if you have a good income and can easily replenish your savings in the future. You will save on interest and don’t have to wait on loan processors or underwriters. The downside is that if you have an emergency or unexpected expense and you’ve used up your savings, you may need to go into debt to cover your new expense.

Home Equity Line of Credit or Home Equity Loan

When you are looking to make property improvements, a home equity line of credit (HELOC) or home equity loan may be a good option. If you’ve been in your home for a while or if property values have gone up, you may be sitting on a nice nest egg of equity. A HELOC or home equity loan may allow you to tap into that stored equity by using your home as collateral. Because you are putting up collateral, you may get more favorable interest rates than unsecured loans or lines of credit. 

However, using your home to secure a loan or a line of credit can have unintended consequences. For instance, some HELOCs may require interest-only payments for a time, with either a balloon payment or significantly higher monthly payments at the end of the loan term. Both situations could be challenging for your budget. If you fail to repay the balance, your lender can foreclose on your property and you could lose your home.

Government Grants

The USDA and HUD offices both have grants and loans available for home repairs and/or improvements. These government-sponsored programs may have more stringent requirements than commercial lenders and limited available funds. 

Some grants may also have occupancy rules that stipulate repayment obligations if you sell the property or move within a set amount of time. However, if you qualify for one of these programs, your loan terms can be extremely favorable with rates as low as 1% and 20-year loan terms.

So, are home improvement loans tax deductible? The answer depends on the improvements made to the property. We know that not all home improvements are tax deductible. Those that are must meet the specific IRS criteria, like medically necessary modifications or energy-efficient upgrades. 

Take some time to explore the IRS criteria to see if your upgrades qualify for tax breaks. And remember, a home improvement loan isn’t your only option for financing your home projects. Whatever option you choose, take time to review the pros and cons of each option.

Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.