Introduction
Tax rules treat ordinary home improvements differently from repairs or business expenses. For most homeowners, routine remodeling costs are not deductible in the year you pay them. However, a limited set of improvements can either qualify for federal tax credits, be deductible as medical or business expenses, or increase your home’s tax basis so you pay less capital gains tax when you sell (IRS guidance summarized below). In my practice helping homeowners plan projects, I see two common errors: assuming every upgrade is deductible, and failing to document costs that later reduce capital gains. Follow the checklist and examples below to avoid those mistakes.
Which improvements may give you tax benefits?
1) Federal energy tax credits
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Residential Clean Energy Credit (formerly the “solar tax credit”): This credit applies to qualifying renewable energy systems—solar photovoltaic (PV), solar water heaters, small wind, geothermal heat pumps, and certain battery storage systems installed at a taxpayer’s primary or secondary residence. The credit is calculated as a percentage of qualified installed costs and is claimed on your federal return (see IRS Residential Clean Energy Credit).
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Energy Efficient Home Improvement Credit (and related credits): Since the Inflation Reduction Act (IRA) and subsequent IRS guidance, several energy-related credits cover specific equipment (e.g., heat pumps, insulation, energy-efficient windows). The credit rules, eligible products, and per-year limits can change; always check the IRS pages for current credit names, eligible property lists, and maximum amounts (IRS Energy Efficient Home Improvement Credit).
Why it matters: credits reduce your tax bill dollar-for-dollar, so a qualifying credit for a heat pump or solar installation often yields a larger immediate tax benefit than a comparable deduction.
2) Home office improvements (self-employed or business owners)
If you use part of your home exclusively and regularly for business, improvements to that space may be deductible in part. Two methods exist:
- Simplified method: a flat rate per square foot (limited) that covers the home-office deduction.
- Actual expense method: you allocate a portion of qualifying expenses, and certain improvements to the office space may be depreciated or expensed over time.
Important: salary employees generally cannot claim the home office deduction on their Form 1040 (post-TCJA changes). For details and audit considerations, see our guide on Home Office Deduction and related audit risks (FinHelp: Home Office Deduction).
3) Medical-related home modifications
Modifications made for medical reasons—wheelchair ramps, widened doorways, handrails, or bathroom changes—can be deductible as medical expenses to the extent they exceed the increase in your home’s value and you itemize and meet the medical-expense threshold (expenses deductible to the extent they exceed 7.5% of your adjusted gross income for most taxpayers). If a modification increases your home’s fair market value, the deductible portion is the cost minus that increase (IRS Publication 502: Medical and Dental Expenses).
4) Rental or business property improvements
If you rent out part of your home or use it in a trade or business, improvements to that portion are not personal expenses. They ordinarily must be capitalized and depreciated over the IRS recovery period (MACRS). Repairs may be currently deductible if they meet the IRS tests for repairs vs. improvements; otherwise, capitalize and depreciate. See IRS guidance on business expenses and depreciation.
5) Basis adjustments that help when you sell
Even when improvements aren’t deductible now, they increase your home’s adjusted basis. A higher basis lowers your taxable capital gain when you sell. Typical qualifying improvements that add to basis include new roofs, room additions, landscaping that’s permanent, and major system replacements (heating, plumbing, electrical). Keep receipts and records to support basis increases (IRS Topic: How To Figure Basis).
Projects that generally are not deductible
- Ordinary repairs (painting, fixing leaks, patching a roof) for a personal residence are not deductible in the year performed.
- Personal living expenses that don’t meet medical or business rules are not deductible.
- Costs of preparing a house for sale (staging, routine cleaning) are not deductible; but capital improvements completed before sale may increase basis.
State and local incentives
Many states, utilities, and local governments offer rebates, tax credits, or low-interest financing for energy improvements. These incentives can interact with federal credits (some rebates reduce the federal creditable basis). Always read program rules and check state energy office sites or the Database of State Incentives for Renewables & Efficiency (DSIRE) for localized incentives.
How to document and claim credits or deductions
- Keep an itemized project file: contractor agreements, invoices, canceled checks, product model numbers, and photos of pre- and post-work conditions.
- Identify which portion is labor vs. materials; some credits allow only qualified equipment and associated installation costs.
- For medical-related work, keep a doctor’s recommendation or medical records that support the necessity of the modification.
- For home office or rental use, keep clear space measurements and use logs to substantiate exclusive, regular business use.
- Use the correct IRS form(s): energy credits commonly use Form 5695 (Residential Energy Credits) or the relevant line instructions; home office expenses use Form 8829 (for Schedule C filers) or the simplified worksheet.
Practical examples
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Solar array: You pay $25,000 for a solar system that qualifies for the Residential Clean Energy Credit. You may be eligible to claim a credit equal to a significant percentage of the installed cost, reducing your federal tax liability dollar-for-dollar (subject to rules and eligible costs). Consult the IRS residential energy credits page for current percentage rules and carryforward options.
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Bathroom remodel for accessibility: You spend $15,000 to widen doors and install a curbless shower on your doctor’s recommendation. If the value of your home increases by $3,000 due to the work, you may deduct $12,000 as a medical expense (subject to the AGI threshold and itemization rules). See IRS Publication 502.
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Basement finished for rental: You convert a previously unused basement into a rental unit and allocate 30% personal/70% rental use. The landlord’s portion of improvements must be capitalized and depreciated; some immediate expenses (repairs) may be deductible.
Common mistakes and audit flags
- Failing to separate business-use improvements from personal-use improvements. Mixing personal and business areas without proper allocation can trigger an adjustment.
- Not documenting energy product model numbers or manufacturer certification statements required by certain credits.
- Claiming personal home repairs as a deduction on Schedule A or Schedule C without meeting strict rules. This is a frequent audit issue.
Professional tips from practice
- Time larger energy projects to years when you have taxable income to absorb credits. Some credits can carry forward, but timing can still affect value.
- If you plan to sell within a few years, keep every receipt: increases to basis reduce taxable capital gains and are often overlooked during a sale.
- When in doubt about whether a change is a repair or an improvement, treat it conservatively for tax planning and consult a tax pro; capitalization errors are costly.
Where to verify current rules (authoritative sources)
- IRS pages on residential energy credits and home office rules (irs.gov). For energy credits see: Residential Clean Energy Credit and Energy Efficient Home Improvement Credit pages on IRS.gov. (IRS guidance is updated regularly.)
- IRS Publication 502 (Medical and Dental Expenses) for rules on medical home modifications.
- IRS Topic and Form instructions for Home Office Deduction and Form 8829 for self-employed filers.
Internal resources on FinHelp
- For details about deductions and audit risks tied to home offices see: Home Office Deduction (https://finhelp.io/glossary/home-office-deduction/).
- For how improvements affect your tax basis—important when you sell—see: How Home Improvements May Affect Your Tax Basis (https://finhelp.io/glossary/how-home-improvements-may-affect-your-tax-basis/).
- For energy-specific credit explanations and product examples on FinHelp, see the Energy Efficient HVAC Tax Credit page (https://finhelp.io/glossary/energy-efficient-hvac-tax-credit/).
Final checklist before you start a project
- Confirm whether the project could qualify for a federal credit or deduction and read the IRS page for the specific credit.
- Check state and utility incentives that could stack with federal benefits.
- Require written estimates and a final invoice with product/model details and total labor separated.
- Keep documentation in a dedicated file and update your home’s basis records.
- Discuss major projects with a CPA or tax adviser—especially when business use, medical necessity, or rental use is involved.
Professional disclaimer
This article is educational and reflects general federal tax rules current as of 2025. It does not replace personalized tax advice. For decisions affecting your specific tax situation, consult a qualified tax professional or CPA and verify current rules on IRS.gov.
References
- IRS: Residential Energy Credits and Energy Efficient Home Improvement Credit pages (irs.gov).
- IRS Publication 502, Medical and Dental Expenses (irs.gov/publications/p502).
- IRS guidance on Home Office Deduction and Form 8829.
- DSIRE (database of state incentives) and select state energy offices for local incentives.
