For many, the stress of tax season also brings the more enjoyable possibility of spending your refund on something out-of-the-ordinary, like your dream home remodel. Also top of mind after tax season is the notion that you may be able to make this year’s home improvements count toward a lower tax burden in the future. That idea is not completely unfounded. Your dream home renovation can absolutely pay off on your tax return – just not in the way that you may think.

For enterprising homeowners, it may be disappointing to learn that while there are some cases in which you can claim a same-year deduction, most of your improvements and renovations can only be claimed in the year in which you sell your home. Just because the payoff isn’t immediate, however, doesn’t mean that renovating isn’t worth it. If you’re smart about planning your renovations and documenting your expenses, you stand to increase the value—referred to by the IRS as the tax basis or cost basis—of your home. This, in turn, will allow you to enjoy a greater return on your investment in the future (and at a lower tax rate to boot).

For tax purposes, home improvement, also referred to as a “capital improvement,”  is any work done that substantially adds to the value of your home, increases its useful life, or adapts it to new uses. When it comes to tax deductions for home improvements, there are typically two acceptable ways to claim them, and the way you do so depends on what kind of improvements you make.

Year-of-Sale Tax Deductible Improvements

Most home improvements aren’t deductible in the tax year in which you complete them, but they may help you reduce the taxes you owe when you do sell your home. Generally, the higher your tax basis in the home, the lower your taxable gain on the sale. Document your expenses well and look forward to a tax break in the year that you sell if your home renovation includes any of the following components.

Home Additions and Expansions

One of the most obvious ways to increase your tax basis is through the addition of square footage. Adding on a mother-in-law suite, a home office, or expanding an existing space in your home appreciates its overall value. Other capital improvements to your home can include adding a swimming pool, a deck or patio, or even a new roof or cooling system.

General Home Upgrades

Capital improvements don’t always need to include huge renovations or additions, however. Even improvements as unobtrusive as updating an essential appliance, retrofitting existing windows and doors with energy-saving upgrades, or adding an entertainment or home security system can count toward improvements that increase the tax basis of your home in the IRS’s eyes. Additionally, improvements with energy-saving benefits may also qualify for a tax credit. If you already have a larger remodel planned, consider budgeting for some of these value-increasing touches as well. 

Same-Year Tax Deductible Improvements

While most homeowners must take a long-game approach when it comes to home improvement deductions, there are some cases in which you can reap the tax benefits of your renovation in the same year that your project is completed. If your renovations fall under one of these categories, you may stand to reap tax deduction benefits in the following year’s return.

Home Improvements for Medical Care

If you make substantial changes to your home or installed special equipment to aid a physically or medically disabled family member, those costs may be considered medical expenses. As such, they may qualify as a medical deduction. Constructing ramps inside or outside of your property, modifying doorways, bathrooms, or counter height, and installing special lifts or handrails can all qualify for a medical deduction under the right circumstances.

Home Office Improvements

While 2020 saw many of us convert some portion of our homes into a makeshift office space, unfortunately for work-from-home employees, home office expenses are not tax-deductible. However, if you are self-employed with a business that operates fully or partially out of your home, improvements you make to your office space can be deducted in that year’s return.

For tax and financial advice best-suited to your financial and tax situation, consult with a licensed advisor or accountant. They can help you determine how your home renovation may affect your unique financial circumstances.

No matter your financial, budgetary, or aesthetic goals for your home renovation, we’re here to help you accomplish them. Contact us today to get started with your dream home renovation.

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With years of experience in both commercial construction and residential construction, Alpha Omega Contractors is your go-to construction company in Southern California. Our experts take on projects ranging from residential kitchen remodels, bathroom remodels, and home renovations to commercial construction upgrades and improvements. As a trusted Orange County contractor and Los Angeles County contractor, we help bring your home remodel wish list and home renovation dreams to life. Whether you need help with a residential floor plan or an upgrade to your medical office or retail space, our team of general contractors, designers, and design-build experts will collaborate with you from the initial stages of pre-construction through to putting the finishing touches on your dream remodel project on time and within budget.

Learn more about how to transform your house into your dream home.