Bad news: You can't write off home improvements.
But wait! There's no need to turn off the computer in disgust and walk away just yet. Although the cost of regular, humdrum improvements isn't deductible on your return, there really are some clever ways to recoup a few of your home costs by knowing the ins and outs of a tax return. From energy efficiency upgrades to improving the parts of your house you use as a home office, we might just find a deduction for the work you've put into your place.
Let's start by looking at a prime example of finding an "improvement" deduction right smack in the middle of another write-off: your mortgage.
10: Use Your Mortgage
Where do home improvement budgets come from? Well, often they're scraped together from savings — and possibly a loan or two. Neither of these is going to help you in the tax department. As we said, home improvements can't be written off like, say, tax preparation fees or medical expenses (although later we'll see how medical expenses might lead to home improvement deductions).
One way you can cleverly deduct your home improvement budget is to roll it into your mortgage when you purchase a house. This might not seem like the most genius plan; you're still paying for the cost of repairs, after all, and getting a bigger mortgage to cover those repairs means you'll be paying more in interest. But remember that if you itemize your deductions, you can write off the cost of your mortgage interest. Add the cost of improvements to your mortgage, and that write-off can increase.
Single and married people filing jointly can deduct home mortgage interest on the first $750,000 of debt, while married-but-filing-separately people can deduct interest on up to $375,000 apiece. Also note that you can deduct interest paid on a home equity loan if the money was used to build or "substantially improve" a home [sources: IRS].
9: Energy Efficiency Upgrades
While some of the tax benefits for energy efficiency improvements expired in 2013, there are a couple of ways to reduce your energy footprint while getting a bit of tax savings.
One is a tax credit for energy efficient systems in your home. It's a one-time credit (meaning you can't take it every year), but it lets you write off 30 percent of the cost of any solar, geothermal, wind or fuel cell technology you're adding to your home (the fuel cell technology applies only to a primary home), as long it was up and running by the end of 2019. Even cooler is that the 30 percent applies to labor and installation as well as the product itself. After that, though, the credit goes down gradually, so that that improvements placed by in service in 2020 get 26 percent, and ones in 2021 get 22 percent. [sources: Perez, TurboTax.]
You can also take a nonbusiness energy property credit for installing home insulation, replacing exterior doors or replacing a furnace, among other items. The credit is 10 percent of the cost, with a maximum of $500 from 2006 to the present. There are a lot of other caveats as well, which you can find in this TurboTax article.
8: Make Improvements and Sell Your House
So this one's a bit tricky to wrap your brain around, but stick with us: When you sell your house, you might be able to get some tax relief from improvements you made before the sale. Now on the surface, this seems exactly like what we told you was impossible: a tax break on a home improvement. But it's a bit more circuitous than that.
When you sell your house, the term "tax basis" refers to the profit you make. And the idea is that any improvements you make to the house while you own it reduces the profit, which leaves you less money on which to be taxed. Note that if the home is your primary residence and you've lived there for more than a year, you only get taxed on the profit you make from selling a home if your gain is over $250,000 for a single person or $500,000 for a married couple filing jointly [source: IRS].
So, if John buys a home for $500,000 and make $50,000 in improvements, his tax basis is now $450,000. If he sells the home for $900,000, he'll pay taxes on the profit of $350,000 — not $400,000. Bear in mind, he'd still be able subtract the $250,000 that won't be taxed from this amount [sources: Anspach, Fishman].
7: Business-Related Depreciation
So, here's a deduction for home improvements that, admittedly, is kind of a stretch on the use of the word "home." But since many people run a business on a property they own or rent, it seems like a good idea to point out some ways that you can deduct property improvements as a business expense.
Again, this applies to improvements you make to a property that you use for business. You don't have to own the land or building; renting works too. But you do have to know the difference between a repair and an improvement, because the rules are a little different. If you make a repair, you can deduct the cost as a business expense — pretty simple. However, if you're making an improvement, then it's a bit more complicated. You have to depreciate the cost of the improvement over the course of its useful life [source: IRS 946]. So, you can deduct the cost of fixing the cracks in the parking lot, but if you replace the whole parking lot, you'll probably have to depreciate the cost over the course of several years.
6: Home Office Improvement Deduction
Another home improvement that might deserve quotation marks around "home": any improvements you make to the home office. Much like the business expense deductions you can make for any improvements to the property you own or rent, the home office is considered a space where any improvements or repairs are subject to deductions.
But let's be cautious. Remember that you can't just claim any old space as your home office; you have to meet some strict requirements from the IRS (i.e., it can't be a space the rest of the family uses recreationally). The improvements to a home office space are completely deductible, so long as 100 percent of that space is used exclusively as an office. Just remember that you'll probably have to depreciate them as well, unless they're repairs.
And here's an extra bonus. Say you add an air conditioner or new water tank to the home. If you use 15 percent of your home for office space, you can depreciate 15 percent of the cost [source: Fishman].