Your Home Improvement Guide to Tax-Deductible Home Projects

Home repairs and home improvements are two different forms of home projects. One of the biggest differences is the fact that home improvement projects may be tax-deductible or be eligible to receive tax benefits. These home improvements are referred to as capital improvements. A capital improvement is defined as any addition or alteration that permanently affects the home. Capital improvements can add value to your home and even provide more opportunities for your property as a homeowner.

Understanding Capital Home Improvements

The Internal Revenue Service (IRS) defines a capital improvement as a change made to the property that you own and either:

  • Adds value to the property
  • Improves the longevity of the property (by at least a year)
  • Opens the home to new uses

How Does a Capital Home Improvement Impact Taxes

It is important to keep track of all costs and expenses when handling a capital home improvement project. You can take the cost of these projects and add that to the price paid for the home. The sum of these costs is referred to as the cost basis. When you sell your home, you will take the final sale price and subtract the cost basis in order to find out how much of a profit you will get on your home. This profit requires capital gains tax that must be paid for.

Sounds complicated? Here is an example:

If you bought your home for $225,000 and had costs of $75,000 worth of home improvements then your total cost basis is $300,000 ($225,000 + $75,000).

When it is time to sell your home you may find that the home is selling for more than when you bought it! Let’s say a homebuyer purchases the house for $425,000. This means that your total profit is $125,000.

You are in luck because the IRS states that single filers can exclude up to $250,000 in capital gains from the sale of a primary residence. The best part is the fact that this may not be the only tax benefit that you could get! If you use specific types of loans to afford the home improvements then you may be able to even claim the interest as a deduction on your taxes.

What’s the Difference Between a Home Improvement and a Home Repair

Both of these home projects may be able to improve the overall quality of your home. However, it’s important to know the difference especially when tax time comes around. You can generally think of a home repair as a form of basic maintenance. For example, if you need to fix your gutters or paint a bedroom a different color then these would be considered home repairs. Home improvements on the other hand are more in-depth. These home projects require more energy, are  time-consuming, and more costly than a normal maintenance repair. These projects can include roof improvements, solar panel installation, storm window installation, adding another bedroom on the home, kitchen modernization, the addition of a pool, and more.

These rules are specifically about primary residences. A rental property that you own is a different setup. In regards to a rental property that you own, you can still deduct the costs of repairs on your taxes.

Types of Home Improvements That You Can Consider

It is important to consider types of home improvement projects that may be able to add value onto your home. It can be hard knowing where to start especially when you want to make sure your next home project is actually an improvement and not a repair.

Solar Panel Installation

Many homeowners are looking for a renewable source of energy and a way to improve their home. Luckily, a solar panel installation can do just the trick. These home improvements can make more affordable electric bills, get additional tax benefits, improve the economy, and allow homeowners to become more energy independent.

Window Replacement

Don’t get this confused with window repair. This is a type of home improvement that may be extremely beneficial to your home. Homeowners improve their windows in order to improve the safety of the home, reduce the allergens in the home, improve energy efficiency, and even reduce the noise level.

Fix Your Roof

Your roof goes through a lot of wear and tear. After a while, it may be time you need to replace or heavily repair your roof. Signs of damage like brown spots, missing shingles, and drooping can indicate it may be time for an extensive home roof project. Luckily, these can be tax deductible and potentially save you money in the long run. If you see that your roof is damaged, don’t wait to get it checked out. A professional roofer will be able to help.

Kitchen Remodel

A kitchen can be considered one of the most important rooms of the home. A place where everyone eats, connects, and gathers can mean that buyers are looking for these spaces to be especially nice. When you upgrade your kitchen with new and improved cabinetry, appliances, and flooring then you’ll likely see an increase in the overall value of your home.

Get a Swimming Pool

This is very dependent on the location of the home! If you live in a cold climate where the outdoors is rarely nice for swimming it may not make sense to get a pool. Also beware of homebuyers viewing a pool as more of a piece of work than an improvement on the home. That is why it is best to consider these improvements if you live in a warm climate.

Build a Fence

Many people value their privacy. That is why many homeowners like some sort of fence. This also makes it easier for homeowners to let pets and children roam freely since they are caged in by the fence. Fences can be made out of a variety of materials which impacts how much they can cost to build. However, the costs upfront will likely be worth it in the end.

How to Handle a Home Improvement Financially

There are many ways that people pay for these home improvements. Some pay for these costs upfront, while others look at financing options to handle these big costs. If you are interested in looking for financing then it is best to look for specifically home improvement options. There are plenty of types of home loans that you can use like a home equity loan, or a personal loan. Other types of financing options are a cash out refinance, a credit card, and a home equity line of credit (HELOC).

Home Equity Loan

When you get a home equity loan, you will be able to get a lump sum of money based on the amount of equity you have in your home. These types of loans are secured by your property. This means that if you are not responsible with your payments then you may face foreclosure of your home.

Personal Loan

These are loans that are designed for personal use. The beauty of these loans is that they can be unsecured. This is different from a home equity loan that is secured with your property. If you mismanage this type of loan you don’t need to worry about facing foreclosure. However, there is still a negative financial impact of late and/or missed payments so it is suggested to handle these loans with care.

Cash Out Refinance

There are many types of refinances. The three most popular options are a rate and term refinance, a cash out refinance, and a cash in refinance. When you get a cash out refinance, you are able to tap into your home’s equity like when you get a home equity loan. Instead of refinancing against the remaining  balance of your original home loan, then you refinance for the total value of your home. The extra funds that you get during closing can be used towards home improvement projects.

Home Equity Line of Credit (HELOC)

The beauty of a HELOC is the fact that you can tap into your home equity. This is a great alternative to a cash out refinance if you still want to use your home equity but don’t want to refinance your home. You aren’t able to get a lump sum but instead you can use a line of credit that works similarly to a credit card. These lines of credit are only available for a specified time frame. Many homebuyers choose this option because they do not need to reapply for a loan and then only need to worry about paying interest on the amount borrowed.

A Traditional Credit Card

It may also be possible to use a traditional credit card to cover the expenses of a home improvement. There are plenty of home improvements that won’t cost tens of thousands of dollars. You can choose home improvements that are affordable and can fit within your line of credit. Try to be aware of keeping your credit utilization between 20 – 30% to best manage your score as well.


Home improvements can be extremely beneficial to your home. You can increase the overall home value, improve the longevity of the home, change your home usage, and improve the quality of the home. There are a variety of home improvement projects to choose from and several ways to handle them financially. Before beginning a home improvement project, it may benefit you to consult a professional before making any changes.

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