Are Home Improvements Tax Deductible?

In general, home repairs are not tax deductible, while home improvements are rarely tax deductible. There are, however, a few types of improvements that do have tax deductions or credits, including medical necessity, home loan interest payments and energy efficiency.

Taxes are computed by taking a person's income (money from all sources earned), subtracting deductions and computing taxes based on the new amount. Tax credits will reduce the taxes owed on that new amount. That is, a deduction will reduce the amount of income that is to be taxed. Credits reduce the taxes a person actually pays. Some tax credits are refundable. If the taxes owed are less than the credit, that person will receive money back. Other tax credits are non-refundable, which means that the person will not receive money back. Tax deductions can only reduce the taxes owed, but will not result in a payment beyond the refund of taxes already paid.

Basic home repairs are not tax-deductible. Basic home repairs are normal house upkeep, such as patching a roof or fixing a leaky pipe. Once a basic home repair becomes large enough, it is considered to be a home improvement. Using roof repairs as an example, patching a portion of the roof would be a basic home repair, while replacing the whole roof would be a home improvement. However, even home improvements are not normally tax deductible. Home improvements can add to the "basis" of a house. The basis is what is used to compute capital gains taxes. By adding the cost of the improvement onto the basis, once the property is sold, a smaller portion of the proceeds of the sale are taxed by the I.R.S. For that reason, adding to the basis of a house is not a tax deduction, but will ultimately reduce a person's taxes. To adequately document an increased basis, it is important to keep all receipts, including the cost of labor.

Although the cost of home improvements is not tax deductible, the interest on loans taken out for the improvements may be. For the interest to be deductible, the total of the mortgages and loans for the home improvement must be less than $500,000, or $1,000,000 for a joint return. However, interest on loans for home repairs is not tax deductible - only interest on home improvements.

Home improvements that are medically necessary - that is, improvements that a doctor orders or that are necessary because of a medical condition - may be tax deductible. Some examples of these deductible expenses are installation wide doors ways to accommodate wheelchairs, accessible bathrooms and sinks, ramps, and even such items as an elevator or pool. In essence, these repairs must be medically necessary, and the deduction only goes as far as the medical condition. As an example, if a person needs to swim daily because of a lung condition, and there are no pools accessible nearby, the costs of building a pool may be tax deductible. If, however, the person builds an Olympic sized pool but only needed a small pool, only the expense up to what a small pool would have cost would be tax deductible - the rest would be added onto the basis of the house and would not be deductible.

Home improvements for energy efficiency are currently subject to a tax credit. Some examples of improvements that fall into this are installation of solar panels for heating water or for energy production, although other more routine repairs may be covered as well, such as installing energy efficient windows. These tax credits are very time sensitive and change frequently, so it is important to seek a tax professional's assistance before attempting to seek a credit on the basis of such improvement.