First point of clarification, most remodeling expenses are not likely to be deductible until you sell your home unless you claim them as some type of expense or capital expenditure for a home based business. If you don’t qualify to deduct home improvements as an expense, another option to look into are tax credits & rebates. Various state and federally funded agencies are incentivizing home owners like you to switch to more eco-friendly home appliances and upgrades.
I’ve put together a non-exhaustive list of these home improvements that will qualify for tax credits. Note that these incentives may differ from city to city depending on what your local city government has made available to you.
You can deduct the cost of home improvements when you sell your home from the capital gains, simple as that. For example, if you bought your home for $500,000 and made $50,000 worth of improvements for a new kitchen then you later sold your home for $600,000. You’ll only be liable to pay taxes on the difference of $50,000.
Bonus tip, if the property you sell is your primary residence, you’ll likely qualify for a tax exclusion of $250,000 for single filers and $500,000 for those filing jointly on the capital gains. Here’s a link to the topic on the IRS website to learn more.
You can deduct 100% of the costs of improvements related to your home office. To qualify for this, you must have a legitimate home-based business to associate the expenses with. If you’re making improvements that benefit the entire home, ie. upgrading the HVAC system, then you can deduct according to the percentage of the home used as a home office. So if 20% of your home is the home office, you can deduct 20% of the cost of that HVAC system upgrade.
So if you have a home based business and you're tired of having to wearing those noise cancelling headphones that made your ears sweaty, it's time to think of building a dedicated home office. We've listed a few creative ideas for where you can build a home office or how you can convert a space into a home office.
A way around having a home based business to associate remodeling expenses with is to rent out a portion of your home and use that rental income as the basis for the deductions. As with the home office, you can deduct 100% of expenses that are directly related to the portion being rented and a fraction of the cost proportional to the percentage of the area being rented if the improvement benefits the entire home.
You can deduct the cost to build & operate the home improvement if it is prescribed by a medical professional as a medical treatment or medically necessary for yourself, your spouse, or dependent.
Deductions for medical related expenses can get a bit complicated. We always recommend you consult with a tax professional if you’re planning on remodeling for medical reasons. You can learn more about deducting medical related improvements here.
As I mentioned above, various government funded agencies are incentivizing homeowners to make their home more energy efficient. The most accessible agencies offering rebates are PG&E & your local city. To find rebates and incentives from your local city, go to your city’s website and search for a page that will likely be titled ‘energy efficiency’ or ‘incentives’ There are also federally funded tax credits for the items we’ve listed below:
With the price of petroleum products continuing to fluctuate and as of late, rise, now is a great time to look into making your home more energy efficient. If you want to learn more about energy efficient upgrades, check out this really helpful article from Turbotax.
Relatively speaking, these seem like pretty large and invasive upgrades to your home. If you feel that way, you can opt for simpler upgrades like replacing your doors, windows, insulation, or ducting for more energy efficient variants. You might be able to deduct the entire cost of these improvements if you plan the deductions right. So find and talk to a tax professional about your energy efficient upgrade deductions.