What Home Improvements are Tax Deductible?

WealthHow Staff Nov 22, 2018
Here are some key and common channels with the help of which you can claim deductions for home improvement have been explained.
Before we begin, keep aside a file of all receipts and invoices of payments you made for home improvements. They are real handy when filing for taxes. Here is a brief explanation of home improvement expenses considered valid tax deductions by Internal Revenue Service (IRS).
These deductions should not be confused with credits. Also, home improvement should also not be confused with tax credit and other tax breaks. A very honest answer to the query is medical expenditure. It is the only deductible expenditure (explanation follows). However you can take advantage of it to claim lawful deductions, in a bit indirect manner.

Tax Deductions and Home Improvements

So what is the exact premise of home improvements in tax deductions. Simple, the IRS, has permitted the income tax filers and tax payers to deduct certain expenditures as a part of their itemized deductions.
Tax breaks such as credits and exemptions, or initial discounts have been covered in the home improvement section. However, the direct deduction is given here:
Direct deduction is the phenomenon where your Adjusted Gross Income (AGI), before the amount of tax is levied, drastically decreases. It must be noted that tax slabs of the year are imposed in percentages on the AGI and deductions which are basically all your expenses can be claimed through certain channels, thereby bringing down the AGI and your liability.
From the total expenditures, only some are viable deductions. Home improvement is an addition to the value of your house. The repairs on the other hand are rectifications of already existing property.
On the whole, when you fill out your Form 1040 for itemized deductions, you will have to make a keen and fine search to see which expenditure is a home improvement and which is a repair.

Tax Deduction List

It must be noted that home improvement tax deductions are directly not valid tax deductions, hence you will need to take differential and indirect deductions. Here are 5 solid paths which you can take.

Topic 502 Medical and Dental Expenses

This sounds a bit odd. Home improvement and medical deductions are two completely different kinds of expenditures, yet if you have taken up home improvement in your house for medical reasons such as specialized medical facilities, then the entire cost of improvement that escalates the value of your house is taken into consideration as a deduction.
The condition is that the improvement should be permanent in nature, and should be taken up for entire the tax filer, his/her spouse or any other dependent who is resident at said place.
Lastly, as per IRS, if the improvement value does not increase the house value, entire expenditure is taken as deduction. Modification of stairways, doors, railing installations and other such modifications are connoted to be deductions as per medical and dental expenditure list.

Topic 505 Interest Expenditure

The interest rate of many different loans, credits and money lending facilities tend to have advantageous deductions if you have undertaken home improvements. Loans like Home Equity Loans and Home Equity Lines of Credit (HELOC) or student loans, tied down to the appraised equity of your home, have a fully deductible interest rate.
This may not be significant in volume or at the time being. But at a later stage the small annual interest rate proves instrumental in bringing down the Adjusted Gross Income (AGI) on your income tax return. The key to claim such deduction is the equity of the house increases substantially after home improvement. It is abstract but relevant indirectly.

Topic 509 Business Use of Home

Based on the fact that if home improvement increases your home equity value, the value of certain related deductions is probable to go up by few dollars. If you are using your house for business purposes, expenditures involved in the business use are deducted from the AGI.
The advantage is that it increases your house's value, and thus this expenditure of business use of house also increases, substantially.

Depreciation

The last deduction you can claim with the home improvement is the depreciation deduction. Like the aforementioned home deductions, the depreciation deduction takes advantage of the increased value of the house. Depreciation is imposed by a percentage value. Value addition in the home's value, tends to boost up the total amount of depreciation.
Thus, on the whole, home improvement based tax deductions are to be availed using indirect methods. The basic premise is that it pushes up the value or equity of your home. Thus the monetary value of deductions that you used to claim earlier also increases and your AGI thus, gets reduced. A reduced AGI means a reduced income tax liability.