Tax-Deductible Home Improvements

(guest post courtesy of Courtney Klosterman)

The past year has been a rocky one financially for homeowners, with rising costs of utilities, insurance premiums, and even the costs of repairs thanks to a combination of severe weather, supply chain issues, and the cost of labor.

However, homeowners are still determined to maintain and improve their homes in 2024. We learned in our recent homeowner regrets survey that nearly a quarter of responding homeowners were planning major renovations this year. 

Certain home improvements have tax benefits that can help alleviate costs and bring upgrades to life. Here are some examples:

Energy-Efficient Upgrades

Homeowners can potentially qualify for an Energy Efficiency Home Improvement Credit of up to $3,200 for energy-efficient improvements made after Jan. 1, 2023. The credit for 2024 is 30% of qualified expenses but has certain limits for different types of improvements.

Energy efficient upgrades can help reduce energy usage, strain on your critical systems, and utility costs while also helping protect your home year-round. Upgrades can include structural improvements to your home and the installation of new systems.

Example projects: 

• You can get a home energy audit from a professional home energy auditor for a tax credit of up to $150. An auditor will help you understand where you’re losing energy and identify health and safety issues in your home. According to the Department of Energy, a home energy audit could help you save up to 30% on your energy bill. (U.S. DOE). To qualify for this credit, the audit must be conducted by a qualified home energy auditor or by one who is supervised by a qualified auditor. It must also include a written report prepared and signed by a qualified home energy auditor and the report must be consistent with industry best practices. Find more information in Notice 2023-59.

• You can install ENERGY STAR’s Most Efficient exterior windows and skylights for a credit of up to $600 based upon eligibility. Replacing windows can help improve insulation and reduce the need to run your HVAC. 

• You can install biomass stoves that meet Energy Star’s requirements for up to a $2,000 credit. Biomass stoves must have a thermal efficiency rating of at least 75% to qualify and costs may include labor to install. Biomass can include wood pellets and grasses. Although burning biomass can reduce energy usage, we recommend following wood-burning best practices to help reduce fire and other health risks.

Alpen High Performance Products holds the top spots in Energy Star's efficiency ratings for high-performance windows, with another win in 2024.

Clean Energy Upgrades

You can potentially qualify for the Residential Clean Energy Credit if you install new renewable energy properties in your home. There is no dollar limit for this credit except for fuel cell properties ($500 for each half kilowatt of capacity).

Using the clean energy you generate can help lower your reliance on traditional utilities and lower usage and bills. Systems like solar panels are generally easy to maintain, typically only requiring regular cleaning to prevent debris buildup. 

Example Projects: 

• Installing a solar water heater can help reduce strain on your traditional water heater and help prolong its life, depending on the type you install. For example, a two-tank solar water heater preheats water before it reaches your traditional water heater. Water heating is typically the second largest energy expense in any home. (DOE)

• Installing geothermal heat pumps can help heat and cool your home more efficiently than traditional heating and cooling systems by transferring heat to the ground rather than generating heat. They tend to be expensive, but according to the Department of Energy, you can potentially see ROI in five to 10 years, depending on available financial incentives (DOE). 

• Battery storage technology helps store excess energy generated from clean energy sources. This gives your home a reliable energy source when the grid goes down. 
  

CertainTeed's Solstice Shingle is an innovative solar roofing solution that combines the benefits of traditional asphalt shingles with the power of solar energy. This advanced roofing system seamlessly integrates solar technology into your home, providing both aesthetic appeal and sustainable energy generation.

Historic Home Upgrades

You can potentially qualify for the Federal Historic Rehabilitation Tax Credit if you are renovating a historic home.

Historic homes can qualify for this tax credit and other grants since many organizations wish to preserve historical buildings. Taking advantage of these can help lower the financial burden of potential repairs while helping you maintain your home’s original beauty.

Example Projects:

·        Upgrading or replacing old pipes may qualify for this tax credit and may be necessary to bring the home up to code and help prevent water damage.

·        Replacing deteriorated parts in the structure of your home, like posts or beams, may qualify for this credit. Replacement should be visually similar to the original and at least equal to the original’s load-bearing capabilities.

·        Fully replacing a deteriorating set of stairs using the same or compatible substitute material can make your home safer and may qualify for this tax credit. The new set of stairs should look similar to the original.

Medically Necessary Upgrades

You can potentially include medically necessary home upgrades as a part of your medical expense deduction. These include improvements that help make your home more accommodating for a disability that you, your spouse, or dependents that live in your home have.

The amount you can include in your medical expense deduction depends on how the improvement impacts your home’s value:

• If your home’s value increases as a result of the improvement, your medical expense is considered the cost of the improvement minus the increase in home value.

• If your home’s value does not increase, you can include the entire cost in your medical expense deduction.

You can invest in upgrades that can help make your home more accessible and help prevent future maintenance issues (which is especially important if you plan to age in place). For example, lowering your kitchen cabinets or installing pull-down shelves can help prevent potential falls and damage when straining for out-of-reach items.

Example projects: 

• Installing modified smoke detectors and other monitoring systems can help alert those with a disability, like alarms with strobe lights for those who are hard of hearing. Smart monitoring systems, like water leak detectors, can also make it easier to detect issues early in hard-to-reach areas.

• Grading, or leveling, the ground can improve accessibility and also help protect your home from water runoff. Grading can help reduce steep slopes and create more accessible pathways for those with mobility challenges. It can also help direct runoff away from your home and prevent standing water.

• Bathroom modifications, like grab bars and railings, can help prevent slips and falls. These modifications can also help prevent water splashes that could lead to mold or mildew over time.

Home Office Repairs and Improvements

You may be able to deduct home office repair expenses if you have a dedicated part of your home that you regularly use as your main place of business, including repairs and maintenance. The amount you can deduct depends on whether the project impacts the entire home or just the office.

Home office improvements are not tax deductible and would be categorized similarly to capital improvements.

Example projects:

·        If you install a full home security system, you can potentially deduct the cost of maintaining and monitoring the system that relates to the business part of your home.

·        Repairing damaged outlets and wiring may be tax deductible and, more importantly, a crucial project to help prevent electrical fires and potential damage to your devices. Electrical distribution or lighting equipment (which includes wiring and outlets) was the leading cause of home property damage from 2016 to 2020 (National Fire Protection Association Home Structure Fires Report, April 2023). Call an electrician for a professional inspection if you suspect electrical issues in your home.

·        You can replace your home office windows with dual or triple-pane windows to help improve insulation and reduce noise. In addition to the tax benefits you may enjoy when you sell your home, this improvement can help lower the need for cooling and heating and lower strain on your HVAC system.

Rental Property Repairs

If you rent out a part of your home, you may be able to deduct repair expenses from the amount of taxable rental income you receive. Limitations apply, such as if you’re renting a space in your current residence.

Maintaining the parts of your home that you rent can help prevent issues from impacting the rest of your home. For example, issues like water leaks or drafts in one area can lead to bigger issues if left unaddressed.

Example Projects That May Qualify: 

• Repairing leaks in your tenant’s bathroom can help prevent long-term mold and mildew issues. Leaks could also impact your home’s structural integrity if drywall or floor joists are left wet over time.

• Addressing air leaks in your tenant’s area can help improve insulation, keep them comfortable, and lower the need to cool or heat that part of your home. You can do so by updating the weather stripping around windows and doors.

• Routinely checking the air vent(s) in your tenant’s part of the home can improve your chances of catching airflow issues early, including dirty vents or leaky ducts. Improved airflow can help boost indoor air quality and regulate temperature throughout your home.

Capital Improvements

Capital improvements are projects that extend your home’s life, add value, or refit your home for new uses. These differ from home repairs, which upkeep your home but don’t necessarily add value (like fixing a leak). 

There are some limitations to the types of improvements you can include. For example, you cannot include the cost of installing carpeting if you later removed it. You also cannot include energy-related improvements if you received subsidies or tax credits for those improvements.

You can add the value of qualifying capital improvements to the cost basis of your home. When you sell your home, you may be able to subtract your adjusted cost basis from the sale price. This can help reduce the amount of capital gains taxes you may owe. However, you’ll also need to take into account the tax implications of the capital gains from the sale of your home. 

Although you won’t see tax benefits from these improvements right away, these projects can help proactively protect your home by getting ahead of potential issues.

Example Projects: 

• Installing a new HVAC system to replace one over 10 to 25 years old, isn’t running efficiently, or is worn beyond repair can help you save money and help protect your home. A modern and efficient HVAC system can improve air circulation, maintain temperature control, and help you cut down on utility costs in the process. 

• Attic insulation installation can cost about $1.80 per square foot and can help reduce heating and cooling costs, easing stress on your HVAC system. A better-insulated attic can also help maintain your roof’s temperature and prevent related damage, like the expanding and contracting that can occur with winter ice dams.

• Installing water softeners can help reduce calcium and magnesium in your water. This helps reduce buildup in plumbing fixtures and pipes and helps appliances run more efficiently and last longer.

*We recommend consulting a tax professional to help you understand what you may qualify for and how that impacts your tax obligations.

4 Tips to Upgrade Your Home with Potential Tax Benefits

Now that you have an idea of what types of projects can qualify for tax benefits, use these steps to help decide what projects you should prioritize.

Step 1: Identify each project’s potential tax benefits.

Learn more about tax law in your state and what tax credits your projects are eligible for. Familiarize yourself with the eligibility requirements for current tax breaks to ensure projects meet the requirements. This can include requirements for documentation and project completion dates.

Step 2: List out considerations for each potential project.

Once you’ve narrowed down projects that can have tax benefits, you can start listing out other considerations for each project. Considerations can include:

• Impact on home property value and ROI

• Potential to proactively protect the home from future risks

• Estimated cost savings for utilities and repairs, if applicable

• Tax benefits and when you can enjoy those benefits

• Necessity for a professional and related labor cost

• Total cost and available financing options

Step 3: Prioritize projects based on key considerations.

Review your list against your homeownership goals for the next few years. Decide which projects can impact your home the most and which ones you can temporarily pause.

Step 4: Keep track of project expenses and supplies.

Keep a log of what you’ve spent for each project, along with receipts, to have on hand when filing your taxes. Keep both digital and physical copies so information is easily accessible during tax season.

Prioritizing home improvements with tax benefits can help lessen your financial burden. Plus, certain home improvements can help make your home more comfortable and improve its value, all while proactively protecting your home.

Editor's Note: Courtney Klosterman, Home Insights Expert at Hippo, the home insurance group focused on proactive home protection.