Are Home Improvements Tax Deductible in 2023?
While you want your remodel to include nice finishings and feature functionality that suits your family’s needs, you still want to save where you can. This is where the 2022 Inflation Reduction Act comes in; the government approved $369 billion toward fighting climate change through tax incentives. It is estimated that if you took advantage of all tax credits that you could potentially get back more than $10,000. The Inflation Reduction Act was introduced to provide direct savings, beginning with 2023 tax credits and rebates, for homeowners who make cost-saving energy efficiency improvements to their homes. This helps with the shortage of inventory in available homes by incentivizing homeowners to stay in their home. It also supports California conservation efforts.
Homeowners typically get excited when remodeling their home. After years of using a kitchen that was definitely not designed to your spec, you’re ready to dig in with a kitchen remodel and make this kitchen functional, bigger or smaller or the same, and beautifully updated to earn compliments from all of your guests.
These are big expenses; don’t be fooled by these home remodeling shows, renovations do not happen in 30 minutes over a glass of wine and cost 15K for a whole kitchen (remember that sponsors are donating materials and these shows are in the midwest where labor is much more affordable). Pending how big your kitchen is and how much change you plan in your kitchen, it can range from 50K on up. That’s a hefty number but an investment in your most valuable asset. Wouldn’t it be great if it were tax deductible?
We’ve done some investigation to see what you can consider a deduction but remember to always check with your professional CPA prior to doing any financial transactions. The answer is yes, you can deduct some home improvement costs.
Energy-Efficient Home Improvement Deductions
One of the easiest ways to take advantage of deductible costs is to install energy-efficient appliances and systems; as the homeowner, you earn tax credits. You can get a federal tax credit of up to 22% when you install any of the qualifying energy-efficient systems in your home:
Solar Panel Tax Incentives
Clean energy systems including solar panels, wind, or geothermal systems are all eligible for up to a 30% rebate; this rebate is generous in the fact that it covers the system cost, the cost of labor to install the system, permitting fees, inspection fees, and the cost of stand-alone batteries with more than 3 kilowatt-hours of storage. There is no cap on the expense, whether you spend $5,000 or $50,000, you will still earn 30% tax incentives on buying and installing the energy-efficient system.
The credit may be used retroactively back to January 2022 all the way to December 31, 2032. The battery credit only started in 2023, and therefore cannot be used retroactively. The credit is reduced to 26% in 2033 and 22% in 2034 for projects completed in those years. There are no locations or income qualifications for this tax credit – everyone is eligible.
Windows, Doors, Skylights
Tax deductions have been eroding as time goes on as these installations are now happening at the builder level; the original tax incentives were up to 30% starting in 2013 and have been dwindling each year. Extensions have been given for systems placed in service after 12/31/2020 and before 01/01/2022; Recently expired, this tax credit is getting a renewal and a nice improvement on benefits. The previous maximum benefit for this tax credit was $500 and now homeowners can earn 30% back, up to $1,200 per year. The requirement for qualification is to install energy-saving improvements such as energy-efficient windows featuring the energy star logo. These energy-efficient doors and windows keep cool air out in the winter and inside in the summer.
Another savings program that covers weatherization is the HOMES (Home Owner Managing Energy Savings) Rebate Program; this rebate program gives you cash back by shrinking your overall home energy use through improved weatherization renovations. The amount of your rebate is dependent upon the savings in energy produced. Save more energy – get more back. Speak to your CPA about all of these recommendations. This one in particular requires proof through your bill or computer modeling – make sure to maximize your savings by planning ahead and speaking to your CPA. There are no qualifications for the HOMES rebate, everyone qualified. Low income families can earn a larger rebate.
Heating & Cooling Appliances
Energy-efficient heating and cooling appliances have been added to the list of inclusions covering the same tax credit as doors, windows, and insulation. It ups the annual credit capacity to $2,000 per year for items like über-efficient heat pump air conditioners, heat pump water heaters, and boilers. If you’re unsure which changes to make, the new law also offers a $150 tax credit per household for a home energy audit.
The tax credit applies to home improvements completed between January 1, 2023 and December 31, 2032. There are a few of heating and cooling appliances, like hot-water boilers, for which the credit expires at the end of 2027. There are no location or income qualifications to claim this tax credit. This does have to be a residential home – commercial projects are no covered by this credit.
Home Improvements that Qualify as Medical Expenses
A popular home improvement plan for homeowners that want to live in their home longer and age in place is to use Universal Design to provide the necessary implements for staying in your home longer and aging with grace.
Which home improvements qualify for Universal Design as medical expenses?
You can add handrails throughout your home, widen doorways and kitchen island perimeter access for wheelchair access, lower countertops, replace cupboards with storage drawers for easier accessibility, lowering your microwave to a drawer, exit ramps, bathroom modifications, and widening hallways. You can see in the image below that this kitchen and kitchen island were designed specifically for a wheelchair to be able to fit around the island as well as to roll up under the island and raise the wheelchair seat to use the island as work or dining space.
If the improvements add value to your home, you cannot deduct these as medical expenses. And if you’re trying to use medical expenses to change the architecture of your home, it’s not going to fly with the IRS. It’s as simple as it seems and there’s plenty of deductions here to take, should you use them for the intended medical use.
Home Improvements with Mortgages
Another creative and clever way to get the home of your dreams is to consider buying a home that checks off a lot of your boxes and incorporate a home remodeling project into your home mortgage; this means you would take out a loan larger than you need and use a portion of this money for your remodeling project. The full amount of the loan interest is deductible, so you will be able to deduct the interest on the loan associated with the home renovation.
Specifically, the interest on the loan may be used as a deduction to offset your income.
Home Sale Exemptions
Under the Home Sale Exemption provision, qualified sellers don’t have to pay capital gains on the resale of their primary residence when it’s under $250,000 in profit as a single seller or $500,000 or less when selling as married and filing joint returns. Because your home remodeling investment increased the basis of your home, they can also help reduce the amount of your selling price that is counted as profit. The goal here is to get these to line up so that your profit does not exceed these limits; and if they do, your tax professional can still limit the taxable portion by using home sale exemptions of your renovation.
How We Can Help
Sea Pointe Construction is a full-service design build remodeling firm specializing in kitchens, bathrooms, room additions, and whole home remodels. Using a design build firm is your best bet at finding a firm that will work with your specific needs whether it be financial tax information, or specific universal design (We have National Kitchen and Bath certified Aging in Place Specialists), or budget management. Design build remodeling has all of your construction professionals under one roof including your project manager, draftsmen, designer, purchaser, structural engineers, electrical, plumbing, framing, and finish carpenters. This means we can collaborate on your project to get you a final cost prior to entering into a construction agreement.
The alternate approach to construction is a general contractor. In this solution, you the homeowner will oversee project managing for your remodel. You will first need a draftsman to draw your as-built floor plan with proper measurements (unless you have your blueprints) and if you want changes to your floorplan, you’ll have them draw the “new” plans. You will then hire your contractor and do your shopping for cabinets, countertops, plumbing fixtures, and all the details associated with the part of your home remodel you will need. Your contractor will then tell you what the cost to build your remodel will be – and if for some reason this is out of your budget (most common problem on this method), you’ll need to revisit your plans with your draftsman to redesign the space to meet your budget and new plans are not free. This approach is initially appealing as you feel like you are saving money with the contractor giving you a low bid with no details included. However, you will continue to see your overall budget creep up as your general contractor provides change orders for unexpected circumstances.
If we’ve heard it once, we’ve heard it a thousand times; “I wish I would have selected you, but at the time you were higher and at the end I ended up paying 20% more than your all-inclusive cost agreement”. We pride ourselves on no change orders unless you change the scope and decide to add on that extra project, the standard GC change order rate is 30%, meaning you will pay 30% more than your original bid on average when working with a general contractor. You can see from our 5-star reviews and detailed feedback that folks love working with Sea Pointe Construction. We pride ourselves on 50% of our business being from referrals and repeat business as this shows just how happy our clients are with our work.
If you’re familiar with the construction world and have the time to tightly manage your GC, this may be the option for you to try and save money and be hands-on. If you’re too busy to be a weekend warrior at the mile of tile or on your project answering questions in a timely manner, some decisions will be made for you. And sometimes you may lose your workers by not providing decisions fast enough, so your contractor slow tracks your project and moves his subcontractors onto other jobs. You can sit at the city offices where you pull permits and hear these stories from inspectors all day long.
At the end of the day, remodeling should be fun, exciting and hopefully not to financially threatening to pull the trigger on getting that kitchen or bathroom of your dreams. Speak with your tax professional to see if any of the above tax exemptions, deductions, or credits are options for you.