Navigating Tax Implications for Home Renovations

Are home renovations tax-deductible? As a rule, no — but there are a few exceptions. Upgrades to your Montgomery or Bucks County home might be tax deductible if they’re done to increase energy efficiency or are medically necessary renovations. Some improvements qualify for tax credits but are not tax deductible. 

Maintaining a home can be expensive, so learning how to potentially offset some costs through available tax credits and deductions can make a big difference. If you’re unsure if your renovations qualify, consulting with a tax professional can help.

Understanding Tax Implications for Home Renovations

Renovating your home can be exciting. However, understanding the tax implications before you dive in can help you make the best decisions and save you money in the long run.

• Capital improvements are upgrades that increase a property’s value or prolong its life. While they aren’t deductible as an immediate expense, they can lower your capital gains tax when you sell your home at a profit. Keeping detailed records of any improvements you make to your home while you own it could reduce the tax bite after closing.
• Energy efficiency upgrades like installing solar panels or ENERGY STAR® appliances might qualify for tax credits, helping offset their costs while reducing your energy bills.
• Medically necessary renovations, such as adding a wheelchair ramp or widening doorways during a bathroom remodel, are sometimes deductible as medical expenses, provided they meet IRS guidelines.

Capital Improvements on a Home You’re Selling

Unlike routine repairs and maintenance that keep your house in good working order, capital improvements add measurable value, adapt it for new uses, or extend its useful life. The IRS defines capital improvements as:

• HVAC systems and related equipment, such as ducts, whole-house humidifiers, wiring, and air filtration systems
• Home additions, including bedrooms, bathrooms, garages, and outdoor living spaces
• Outdoor upgrades like landscaping, driveways, retaining walls, and lawn sprinklers
• Exterior improvements, including new windows, doors, siding, and a new roof
• Insulation for walls, floors, ducts, or an attic
• Plumbing, including water heaters, septic systems, and filtration systems
• Interior improvements like security systems, built-in appliances, kitchen modernization, and new flooring

Capital gains are the profit you make when you sell your home for more than its original cost plus improvements. The home sale exclusion allows homeowners to exclude up to $500,000 of that profit if they’ve owned and lived in the house for at least five of the previous eight years.

To lower capital gains tax, you should consider holding onto your home longer or timing a sale for a year in which your income is lower. A tax advisor can help you understand your specific tax implications.

Capital Improvements vs. Repairs: What’s the Difference?

While common repairs like fixing a leaky faucet, patching a roof, or repainting walls aren’t generally tax-deductible, they could be if they’re part of a larger project, such as a whole-home renovation, when they might qualify as capital improvements.

For instance, patching a leaky roof is a repair to prevent further damage; replacing the entire roof might be considered a capital improvement, especially if it has a longer lifespan or is of higher quality.

Likewise, replacing wall outlets and light switches won’t qualify for a tax deduction. However, adding new circuits or completely rewiring your home to update its electrical system is likely a capital improvement.

Capital Improvements: Examples & Opportunities

If you’re planning a home remodel or renovation project, you can strategically incorporate capital improvements to boost home value and reduce future tax obligations. Here are just a few examples of how to do it.

• Kitchen remodels: In addition to updating cabinets and countertops, consider upgrading the electrical system to handle modern appliances or installing energy-efficient windows.
• Bathroom renovations: Replacing outdated fixtures is common, but upgrading the plumbing throughout the house, including adding water-saving features, can be considered a capital improvement that adds long-term value.
• Whole-house remodels: If you’re renovating multiple rooms, consider upgrading the house’s flooring. You might also want to replace an aging roof or add a new HVAC system as part of the project.
• Home additions: Adding a new bedroom, bathroom, or home office can qualify as a capital improvement. You’ll likely need to upgrade your home’s plumbing, electrical wiring, and insulation to complete this project.

Federal Tax Credit Programs & Eligibility

Tax credits directly reduce your tax bill; deductions lower taxable income. Several federal programs offer tax credits for energy-efficient home upgrades:

1. The High-Efficiency Electric Home Rebate Act provides rebates for energy-efficient upgrades, including heat pumps, insulation, and new electrical systems.
2. The Home Electrification & Appliance Rebates Program offers rebates for switching to energy-efficient appliances, such as electric stoves and heat pump water heaters.
3. The Home Efficiency Rebates Program encourages whole-home energy efficiency improvements like insulation and window replacements.

What Tax Credits Are Available for Pennsylvania Homeowners?

Pennsylvania homeowners can access several tax credits for energy-efficient upgrades:

• Installing windows, skylights, and exterior doors can qualify for a credit under the Home Efficiency Rebates Program.
• Upgrading insulation allows you to apply for credits under the High-Efficiency Electric Home Rebate Act.
• Installing electric stoves and cooktops, dishwashers, freezers and refrigerators, clothes washers, and dryers is covered by the Home Electrification & Appliance Rebates Program.

Tax Deductions for Medically Necessary Home Improvements

Additions or whole-home renovations are sometimes required to accommodate a family member’s medical needs, such as wheelchair access. Medically necessary home improvements often qualify for tax deductions. IRS examples include:

• Widening doorways
• Installing ramps
• Modifying bathrooms for accessibility

More homeowners are now investing in aging-in-place remodeling to ensure their homes remain comfortable and accessible as they grow older.

Common aging-in-place upgrades like lowering countertops for wheelchair access, adding walk-in showers, and improving overall accessibility can provide peace of mind while increasing a home’s value. If the changes are medically necessary, they might be eligible for tax deductions.

Schedule a Consultation With Meridian Construction

At Meridian Construction, we take great pride in working closely with homeowners to deliver exceptional remodeling and renovation projects that enhance their home’s beauty and functionality. These improvements can also help you save money through capital improvements, tax credits, and tax deductions.

Our design/build process ensures every project reflects a commitment to quality and client satisfaction.

Ready to start your home remodel? Schedule a consultation today — and talk to a tax professional to understand how specific upgrades could affect your tax situation.