Are Home Improvements Tax-Deductible?

Even before working from home became commonplace, many entrepreneurs, IT pros, artists, and other professionals operated businesses out of home offices. To get your office into full working order, you may have to make improvements or adjustments. Many of these improvements may be tax-deductible. 

To qualify for a home office deduction, your living space must meet two criteria: 

• It must be your primary place of business, not just a “satellite” office 
• It must have an area dedicated entirely to running the business 

Some upgrade expenses that qualify for a home office deduction include: 

• Insurance 
• Interest on mortgage 
• Utilities 
• Repairs 
• Rent 
• Depreciation 
• Maintenance 

It’s a good idea to verify with your tax counselor that these expenses are eligible for tax deductions and find out whether there are others that may be appropriate for you.  

Improvements to your home’s energy efficiency are usually eligible for tax credits, meaning your tax bill will be lower rather than your taxable income. 

Typically, tax credits yield more savings than deductions. Homeowners therefore have more incentive to invest in energy-efficient equipment and retrofit their homes. The credit a homeowner receives reflects a percentage of the cost of a “qualified property.” 

Some of the energy-efficient home improvement projects that may qualify for tax credits include: 

• Solar panel or water heater installation 
• Small wind turbines 
• Energy-efficient windows, doors, and insulation 
• Electric vehicle charging stations 
• Energy-efficient HVAC systems 
• Biomass stoves using plant-derived fuel 
• Geothermal heat pumps 

Your financial advisor should be aware of more home improvements that fall under this category.  

The IRS allows deductions on renovations made to accommodate those with special medical needs. Per Section 213 of the Internal Revenue Code, such improvements must “alleviate or prevent a physical or mental disability or illness” — they exclude expenses that only improve general health. 

Some of the improvements that may be deducted as medical expenses include: 

• Ramps or handrails 
• Bathroom grab bars 
• Modified doorways for wheelchairs or walkers 
• Lower cabinets and countertops 
• Therapeutic swimming pools 
• Alert lights and alarms 

Note that if an improvement not only improves accessibility but also results in a permanent increase in your home and property value, it may qualify for a tax deduction. 

Some homeowners choose to rent out parts of their homes to outside parties. If you’re considering doing this, you might receive a tax break by writing off portions of your cost basis via depreciation for every year you rent out your home. These repairs are especially tax-deductible if they’re necessary to keep the property in good condition. 

To qualify for the depreciation break, the improvements must only be made to the rented portion of your property. If, by chance, they end up improving the entire home, the value can be depreciated corresponding to the percentage of the home that’s rented out.