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What is the Home Renovation Tax Credit?

Jul 01, 2020 by Aly J. Yale

Home renovations can be expensive. But if they come with a tax credit or handy deduction? That can help offset that high cost and make them even more worthwhile in the long run.

Fortunately, there are a few scenarios in which home improvements might do just that. Some equal a home renovation tax credit, which lowers your tax bill directly, while others come with a tax deduction, allowing you to reduce your taxable income accordingly. In both cases, you save money -- sometimes pretty significantly, too.

Are you planning renovations or remodeling on your property? Here are a few situations when you might get a valuable tax credit or deduction for your efforts.

Scenario 1: You're improving your home's energy efficiency or installing an eco-friendly appliance

If you're making updates to your home that reduce its overall energy consumption, you might very well qualify for an energy tax credit, which helps reduce your annual tax burden.

There are two types of credits you can leverage here:

  • The renewable energy tax credit.
  • The nonbusiness energy property tax credit.

With the renewable energy credit, you'll need to be installing some sort of renewable energy system on the property -- meaning a geothermal heat pump, a solar panel system, a wind turbine, or fuel cells.

Though these typically cost a pretty penny, the credits are just as hefty. Defending on when the system is installed, you can get a dollar-for-dollar credit for up to 30% of its total costs (installation included).

The second type of energy-related tax credit is the nonbusiness energy property tax credit, which is aimed at smaller-scale home improvements, like installing Energy Star appliances, upgrading your insulation, or choosing more efficient windows or doors. These credits range anywhere from $50 to $500 each.

Tax Credit Amount Types of Improvements
Renewable energy tax credit 22% to 30% of the system's cost, including installation Fuel cell systems.
Geothermal heat pumps.
Small wind turbines.
Solar energy systems.
Solar water heaters.
Nonbusiness energy property tax credit $50 to $500 Biomass stoves.
Central air conditioners.
Energy-star rated air source heat pumps.
Hot water boilers.
Water heaters.

A quick note here: Many energy-efficient home improvements can also qualify you for local tax refunds, discounts, and rebates, so make sure to research what's available in your specific area or municipality. (The database at the Clean Energy Technology Center can help with this.) You can also check with your utility providers and water company, as many offer rebates for homeowners using renewable energy or eco-friendly appliances and systems.

Scenario 2: You're improving the home for improved accessibility or due to a medical condition

If you're updating your property in order to make it more accessible or to accommodate a disability or medical condition -- like adding a wheelchair ramp, for example -- it could qualify as what the IRS deems a "medical expense." And if your medical expenses clock in at 7.5% of your adjusted gross income (AGI) in a single year? You can write them off from your annual returns.

To see if your renovations fit the bill, first see the IRS's exact definition of medical expenses: "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes."

Improvements would likely fall into the latter category -- under equipment and supplies, as long as they were used for you, your spouse, a dependent, or a qualifying relative. Here are just a few of the specific improvements the IRS says qualify as a medical expense:

  • Widening doorways and entrances.
  • Constructing ramps at entries or exits.
  • Installing railings and support bars.
  • Lowering cabinets.
  • Adding lifts.
  • Modifying features, like stairways, outlets, and fire alarm systems.
  • Grading the ground around the home.

Again, these expenses have to go beyond 7.5% of your AGI to be deductible. If they do go past this threshold, you can only deduct the amount that goes over 7.5% (not the total costs).

Scenario 3: You used a home equity line of credit (HELOC) or home equity loan to pay for your improvements

If you used a home equity loan or home equity line of credit to pay for your home renovations, then you may qualify for yet another tax perk. For this one, you'll get a write-off equal to the amount of interest you paid on your HELOC or home equity loan across the year.

The kicker here is that you must have used those loans to pay only for home improvements, and those improvements had to "substantially improve" the value of your property.

Another catch? You still can't write off more in mortgage interest than the Tax Cuts and Jobs Act allows. Under this 2017 law, homeowners can only deduct interest paid on up to $750,000 in mortgage debt -- across all loans, lines of credit, etc., that are secured by the home.

The bottom line

Some home improvements can qualify you for a valuable tax benefit, but only in very specific scenarios. If you're hoping to leverage some of these key tax incentives, make sure to plan your upgrades carefully. You should also make sure to choose qualifying products and keep good track of your expenses. If you're using a deduction like the medical expenses write-off, you'll need receipts and bank statements showing just how much you spent on the improvements before you file your tax return.

Also, you should always work with an experienced tax professional if you're planning to use a new credit or deduction. They can make sure you're following IRS protocol and maximizing the full power of your tax benefits.

Finally, don't forget to shop any tax-free sales your state offers. In Alabama, for example, there's a tax-free weekend for items related to disaster preparedness. A lot of home improvement items can fall into this category and qualify you for some serious savings.

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