How Your Home Improvement Can Make You Smile at Tax Time

Making home improvements may not be as expensive as you think. Actually, that’s not true, it’s probably exactly as expensive as you think, especially if you’ve already gotten an estimate for the work. But depending on what you’re doing, and how you're paying for it, you may be able to catch a break at tax time.

Tax-friendly home improvements

  • Use your mortgage. If you already know what you want to improve or add to your home when you buy it, take out a mortgage large enough to cover the additional costs if you can. That way, you can deduct your mortgage interest come tax time.

  • Use a home equity line of credit (HELOC) to pay for the improvements. As long as you meet IRS requirements, you can deduct the interest you pay on a HELOC. If you have enough equity in your home, this can be a great way to pay for improvements.

  • Making your home more energy efficient. If you make improvements or add something to your home that increases energy efficiency, you may be able to claim a tax credit of as much as $500. Covered improvements could include new windows, a new roof, or certain heating and air systems.

  • Making changes that are medically necessary. You can claim deductions based on improvements needed to make your house accessible. This might include things like widening doors, adding ramps or rails, modifying cabinets, or adding lifts. In some cases, these improvements increase the value of the home; you can only deduct the amount spent that was more than the increase to the value of your home. An example? Whether or not you need it for your health, adding central air increases the value of your home, so that wouldn’t qualify.

  • Capital Improvements. These are things that increase the value of your home, like an addition that adds square footage, an in-ground pool, additional windows, or even landscaping. But you can’t deduct them right away. You may be able to claim them when you sell your home. Because of the capital gains tax exemption (currently $250,000 for an individual and $500,000 for a married couple filing jointly), you won’t pay taxes on a profit up to a certain amount. If your profit exceeds that amount, you can use the money spent on capital improvements to reduce your tax liability.

No amount of tax credits or deductions will make your home improvements or renovation free, but it’s always worth it to keep scrupulous records and do your research to see if you qualify for a tax deduction or credit. Who doesn’t like a little break at tax time?