Home Improvements and Taxes: Which Projects Are Deductible or Creditable?

Introduction

Home improvements can do more than boost curb appeal — some projects also change your tax picture. Certain renovations give homeowners federal tax credits (which reduce tax liability dollar-for-dollar) or deductions (which reduce taxable income). Which projects qualify depends on the improvement type, who pays, how you use the space, and current law. In my 15 years advising clients on tax-efficient home upgrades, I’ve seen energy credits and properly documented home-office improvements deliver the biggest, most reliable tax benefits.

How tax credits differ from deductions

• Tax credit: Directly reduces the amount of tax you owe (e.g., a $3,000 credit lowers tax liability by $3,000). The most common residential example is the federal Residential Clean Energy Credit. (See IRS Form 5695: https://www.irs.gov/forms-pubs/about-form-5695.)
• Tax deduction: Lowers your taxable income. Deductions can be itemized (Schedule A) or business-related (Schedule C/Form 8829). Medical-related home modifications may be deductible as medical expenses on Schedule A if they exceed the medical-expense floor (7.5% of adjusted gross income) — see IRS Publication 502: https://www.irs.gov/publications/p502.

Key categories of home improvements that commonly have tax implications

1) Energy-efficient and renewable energy projects (tax credits)

• What qualifies: Solar electric (PV) systems, solar water heaters, residential wind turbines, geothermal heat pumps, and battery storage systems (when installed with a qualified energy system) generally qualify for the Residential Clean Energy Credit. Energy-efficient windows, doors, insulation, and certain HVAC upgrades may qualify for other residential energy credits or incentives depending on the tax year and program.
• Credit amount and timing: Under current federal law through 2032, many qualified residential clean energy systems are eligible for a credit of up to 30% of costs (check IRS Form 5695 and the latest guidance for precise percentages and extensions). Always confirm the year the property was placed in service and consult Form 5695 instructions.
• How to claim: File IRS Form 5695 with your Form 1040 for the year the system is placed in service. Keep manufacturer certification statements, installer contracts, invoices, and proof of payment.
• Tip and resource: For step-by-step instructions, see this FinHelp guide: How to Claim Home Energy Tax Credits: A Step-by-Step Guide. Also review federal guidance at the IRS page for Form 5695: https://www.irs.gov/forms-pubs/about-form-5695.

2) Medical home improvements (deductible medical expenses when rules met)

• What qualifies: Home modifications primarily for medical care — e.g., ramps, widened doorways, handrails, or bathroom modifications for safe access — may be deductible to the extent they exceed the medical expense floor and are primarily for medical care of you, your spouse, or dependents.
• Important limits: Only the amount by which medical expenses exceed 7.5% of your AGI is deductible (current threshold). If the improvement increases the property’s value, the deductible amount is limited to the excess cost over the increase in home value. See IRS Publication 502 for details: https://www.irs.gov/publications/p502.
• Example: If a $15,000 bathroom remodel for accessibility increases your home’s value by $4,000, the potentially deductible medical expense is $11,000 (subject to the 7.5% AGI floor). Keep clear documentation linking the work to medical necessity.

3) Home office improvements (business expense or depreciation)

• What qualifies: Improvements made exclusively for a qualifying home office used regularly and exclusively for business can be deductible. Examples: constructing a dedicated home-office room, electrical upgrades for business equipment, or built-in shelving may be deductible or depreciable.
• How it’s reported: Self-employed taxpayers typically report home-office expenses on Schedule C and use Form 8829 (Expenses for Business Use of Your Home) to compute deductible depreciation and direct expenses. Employees who are not self-employed generally cannot deduct home office expenses for federal tax purposes post-2017 unless they are performing services as statutorily eligible (rare).
• Capital improvements vs repairs: Capital improvements that add value or extend useful life generally must be depreciated over their recovery period rather than deducted fully in the year paid. Routine repairs that affect only the business portion and do not add lasting value may be deductible as current expenses.
• FinHelp coverage: See our deeper guides on Home Office Deduction and specifics about internet and rent treatment in our related posts.

4) Casualty losses, major repairs, and capital improvements (limited deductibility)

• Casualty losses: Federally deductible casualty losses (e.g., unreimbursed losses from a federally declared disaster) have Congress-set limits and reporting rules. Most casualty losses are no longer deductible for tax years not associated with declared disasters. Consult IRS guidance and Pub 547 for casualty and theft losses.
• Capital improvements and home basis: Most personal home improvements are not currently deductible but increase your cost basis in the home. When you sell, a higher basis reduces taxable capital gain. See IRS Publication 523 (Selling Your Home) and Publication 551 for basis rules: https://www.irs.gov/publications/p523.

How to claim — by project type

• Energy credits: Use Form 5695 and follow instructions. Maintain receipts, manufacturer certification statements, and installer contracts.
• Medical improvements: Include eligible amounts as medical expenses on Schedule A (Form 1040) if you itemize. Document a doctor’s recommendation and keep before-and-after valuations of the property.
• Business/home office: Use Form 8829 and Schedule C for self-employed taxpayers; if you use the simplified home-office method, follow IRS simplified method instructions and keep clear records of square footage.

Recordkeeping checklist (practical items I recommend to clients)

• Contracts and invoices from contractors and suppliers.
• Proof of payment (bank statements, cancelled checks, credit-card statements).
• Manufacturer certification statements (for energy equipment).
• Before-and-after property valuation or appraisals for medical modifications that affect value.
• A dated photo record of the work site and receipts for materials.
• For home-office work, floor plans showing the business-use portion, and business logs showing hours worked if applicable.

Common mistakes and how to avoid them

• Mistake: Treating all improvements as deductible. Reality: Most personal home improvements are capitalized to basis and not deductible today.
• Mistake: Failing to separate personal from business use. Fix: Allocate expenses by percentage of business use and only claim the business portion.
• Mistake: Not documenting medical necessity. Fix: Keep doctor’s notes or prescriptions and records showing the link between the work and the medical condition.
• Mistake: Using the wrong tax form to claim an energy credit. Fix: Use Form 5695 and follow the manufacturer/installer documentation requirements.

Practical examples

• Solar installation (illustrative): You pay $20,000 for a qualifying solar PV system in 2025. If the applicable Residential Clean Energy Credit is 30%, you may be eligible for a $6,000 nonrefundable credit on that year’s tax return (report on Form 5695). Carryover rules can apply if the credit exceeds tax liability; check current IRS guidance.
• Home office improvement (illustrative): You convert a 200 sq ft detached garage into a home studio used 100% for your business. The construction cost is $25,000. Because it’s a capital improvement tied to business use, you generally capitalize and depreciate the cost over the applicable recovery period on Form 8829.

State and utility incentives

• Many states and utilities offer rebates, tax credits, or performance-based incentives for energy upgrades. These programs change frequently; check your state energy office, local utility, or DSIRE (sponsored by the NC Clean Energy Technology Center) for up-to-date incentives.

When to consult a tax professional

• If a project mixes personal, medical, and business uses (common in additions), consult a CPA to allocate costs correctly.
• If you plan a major energy system and expect to claim credits or depreciation, get tax-impact modeling so you can time the project to maximize benefits.

Authoritative resources and forms

• IRS Form 5695, Residential Energy Credits: https://www.irs.gov/forms-pubs/about-form-5695
• IRS Publication 502, Medical and Dental Expenses: https://www.irs.gov/publications/p502
• IRS Publication 587, Business Use of Your Home: https://www.irs.gov/publications/p587
• IRS Publication 523, Selling Your Home (basis rules): https://www.irs.gov/publications/p523

Internal FinHelp resources

• Detailed home-energy claiming steps: How to Claim Home Energy Tax Credits: A Step-by-Step Guide
• Home office rules and common audit triggers: Home Office Deduction
• Solar-specific guidance: Solar Panel Installation Deduction

Final tips

• Document everything at the time of the project — it’s far easier than reconstructing records later.
• Distinguish between credits and deductions and choose the right tax-year to claim benefits when timing matters.
• If you’re unsure, pay for a short consultation with a CPA — that fee often pays for itself when it prevents misfiling or helps you capture larger credits.

Professional disclaimer

This article is educational and general in nature and does not constitute individualized tax advice. Tax laws change; consult a licensed CPA or tax professional for advice tailored to your specific situation.