How to Deduct Home-Improvement Projects on Taxes

Home-improvement deductions can reduce your tax liability.

If you carry out projects that increase the value of your home in some way, you can deduct the costs from your taxes. The way you deduct home-improvement projects varies by situation. Depending on the project, you have to fill out different forms to claim the tax deductions.

Instructions

1. Keep all the documents relating to your home-improvement projects in a safe place. You may need to show these documents to the tax authorities to prove your deductions. The Internal Revenue Service (IRS) recommends that you keep your purchase contract, settlement papers, receipts, checks and other financial documents for at least three years after you file the return.

2. Calculate the costs of all your home-improvement projects that qualify for energy credits. The amount you can claim and the limit of deduction vary depending on the type of energy improvement and the year of the improvement. Because the qualification standards may change from year to year, check the Energy Star website before filing your taxes. At the time of publication you can claim 10 percent of the cost if you install certain types of roofs, water heaters, windows, doors and biomass stoves. You can claim 30 percent of the cost for wind turbines, solar energy systems and fuel cells. List these deductions on IRS Form 5695 for the appropriate year and on line 52 of your 1040 form.

3. Add up all the costs of improving your home for medical purposes. For example, if one of your household members need ramps for accessibility, you can deduct the cost of their installation. Calculate the amount by which these costs exceed 7.5 percent of your adjusted gross income. Itemize the resulting figure on Schedule A of Form 1040.

4. Find the total of the points and interest you pay on any home-improvement loan you took out to pay for your projects. You can only deduct the amount of interest that applies to the year you claim the deductions. Your lender may send you Form 1098 to show the amount of interest you can claim. Enter this amount on line 10 of Schedule A of Form 1040. If you don't have Form 1098, list your deductible interest on line 11 and deductible points on line 12 of Schedule A of Form 1040.

5. Deduct home-improvement project costs that don't qualify for the deductions mentioned above only when you sell the property. Deduct the sale proceeds by the amount of money you paid to acquire the property. Deduct your home-improvement costs from this figure. If you end up with $250,000 or more in capital gains, you have to pay taxes on this amount. If you are married filing jointly, the limit goes up to $500,000. List the amount of your gain on Schedule D of Form 1040.

6. Add up all your home improvement deductions on your Form 1040

References

• IRS: Tax Information for Homeowners
• Bankrate; Tax-Deductible Home Improvements; Kay Bell; April 2007
• Energy Star: How Do I Apply for the Tax Credit?
• TurboTax: Home Improvements and Your Taxes
• IRS: Property (Basis, Sale of Home, etc.)

Resources

• Energy Star: 2011 Federal Tax Credits for Consumer Energy Efficiency