Owning a home is a great vehicle for tax savings. You can typically write off property taxes, home mortgage interest, and more. Unfortunately, home renovations are not typically a tax deduction. Typically, you’ll only be able to see a tax saving on home improvements when you sell your home.
But there are certain situations where you’re allowed to make tax deductions for home improvements, including medically necessary updates, energy generating installations, home office improvements, and energy efficient updates. Most often, home owners will be able to take advantage of energy efficient updates, and many of them can be completed in a matter of days, just in time for the end of the year. Consider these home improvement tax deductions before the end of the year to save on your 2015 taxes.
- Accessibility updates: Home improvements that count as medical expenses can be qualified for a deduction. That means making your home more accessible for a wheelchair or other need can be written off. Improvements in this area can include modifying bathrooms, lowering cabinets, installing hand rails, and installing entrance ramps. Deductions that accommodate an illness can also count, including removing asbestos, removing lead based paint, replacing installation, or installing new air filters or air conditioning units.
- Energy generating installations: With qualifying energy systems, you can get 30% of the cost of the system back as a tax credit. This includes geothermal heat pumps, solar water heaters, solar panels, small wind turbines, and fuel cells. It applies to labor and installation as well, and there is no maxumum limit except for fuel cells.
- Home office improvements: If you use a portion of your home as an office for your business exclusively and regularly for the business, you can deduct 100% of the cost of improvements for your home office. That means you can write off building a new room or structure in your backyard for your office, or for improvements like bookshelves that are exclusive to your home office. Note: improvements on your entire home, such as a new air conditioning unit, can be depreciated as a home office expense at your home office percentage.
- Energy efficient home improvements: While medical expenses, home office deductions, and high cost energy generation installations may not apply to most home owners, energy efficient update deductions can be used by anyone — and completed within the next couple of weeks for a 2015 write off on your taxes. These updates include insulation, windows, doors, roofs, water heaters, and heating and air conditioning systems. You’ll need to get written certification from the manufacturer that the product qualifies for the tax credit and keep it with your tax records.
Tips for Deductions
Home improvement deductions are somewhat out of the ordinary, so you should be prepared to have them scrutinized. Make sure you’re ready by following these tips.
- Pay close attention to home office rules: Using a home office as a deduction improperly can put you on the fast track to an audit from the IRS, so be careful. You should only be writing off the actual percentage of your home (calculating using square feet of your office vs. the square feet of your home) for deductions. Improvements made exclusively to your home office can be written off at 100%, while whole home deductions like an air conditioner will be written off using the percentage of your home that your home office takes up.
- Deduct a reasonable amount: The IRS allows taxpayers to deduct a reasonable amount for most deductions. That means your deduction should be comparable to similar improvements that are made in your area.
- Retain paperwork: Save all of your paperwork from contractor receipts to manufacturer certifications. You typically won’t be required to turn them in with your taxes, but you should have them available in case of an audit or a request from the IRS.
- Do not write off general improvements or maintenance: Except as applied under home office expenses, energy efficient improvements, or as a loss in the sale of a home, the IRS does not allow home owners to write off general home improvements, such as a new coat of exterior paint or a bathroom renovation. Avoid making these deductions, or you may face IRS scrutiny.
- Claim casualty losses: Though not necessarily a home improvement but rather an emergency home repair, casualty losses from natural disasters such as fire, flood, or snowstorm can be added as a deduction under certain situations. This applies if the president has declared your area to be a disaster area, and you’ve had documentable losses for your home.