Are Home Improvement Loans Tax Deductible

Are home improvement loans tax deductible?

Home improvement loans are tax-deductible, but not exactly in the way you might think. According to the Internal Revenue Service, you can deduct any interest you pay on home improvement loans provided that they are used to "buy, build, or substantially improve a taxpayer's home."
There are some caveats to this, which we'll go more in-depth about below, but for now, what you need to know is that most home improvement loans are tax-deductible provided that the home improvement is "substantial" and that it contributes to an increase in the overall home value. In other words, basic repairs don't count.
Not only that, but interest paid home improvement loans can only be tax deductible if the home used to secure the loan (the home used as collateral) is the same one where the renovations are being done.
For most homeowners, the home mortgage interest deduction is the first step in getting a bit of money back. The home mortgage interest deduction deducts interest from a primary or secondary mortgage from your taxes. An example of a secondary mortgage is a home equity loan – a common source of home improvement loans for many people.
Now, for you to take this home mortgage interest deduction, your debt has to be secured by a qualified home (your collateral). An unsecured loan – like certain types of personal loans – do not qualify for tax deduction purposes.
Again, the home has to be your main or second home – third or fourth homes don't count. It could be a house condominium, house trailer, mobile home, cooperative, boat, or any other kind of similar property as long as it meets the following conditions:
You use the home for more than 14 days a year (or more than 10% of the overall number of days in the year that the home is used as a rental)
It has separate sleeping, cooking, and toilet facilities
You can often deduct mortgage insurance premiums, home mortgage interest, and home equity loan interest from your taxes. Usually, you can deduct the full amount of your home mortgage interest but this depends on the date it was taken out and how much it is for (up to $375,000 for a single person and $750,000 for a married couple filing jointly unless the mortgage is an older one).

What home improvements are tax deductible?

For a home improvement to be tax-deductible, it must be something that adds value to your home. A repair – or something that you do to keep your home in good functioning order – is not something that can be deducted. Replacing a broken window wouldn't be considered a tax-deductible expense – but replacing a broken window with Energy Star rated windows would.
Tax deductions can also occur in a home office, rental property, or for qualifying medical expenses.

What is considered a substantial home improvement?

Again, the renovations must "substantially improve your home" – or be considered "substantial home improvements."
This wasn't always the case. Prior to the Tax Cuts and Jobs Act of 2017, every single home equity loan was tax deductible, regardless of what they were being used for. Now, if you're using the loan for something unrelated to your home – like a vacation or to pay off credit card debt – it does not qualify for any kind of tax deduction.
If you are using your home improvement loan to finance home repairs, don't expect to get a deduction, either. For example, things like painting and gutter cleaning don't count unless they are smaller parts of a more substantial project. For instance, if you use a home improvement loan to renovate your entire kitchen and it needs to be repainted at the end, the painting can be wrapped in with the rest of the project and be used as a tax deductible expense.
Examples of tax-deductible "substantial" home improvements include:
Adding new insulation
Building an addition
Installing a new roof (repairing an old one usually doesn't count)
Building a deck
Doing major landscaping work
Installing more energy-efficient appliances, utilities, and equipment
Even medical expenses that aren't covered by your health insurance provider can count. For example, adding ramps, enlarging doorways for wheelchairs, or fitting handrails in the bathroom can count for the purpose of tax deductions.

What are other tax benefits of home improvements?

There are other tax benefits of home improvements.
For example, you can get a limited-time tax credit if you claim the cost for installing energy-efficient technology (like solar panels) on your property. the Residential Renewable Energy Tax Credit is a limited-time credit that lets you claim any of these renovations for deduction:
Adding solar hot water heaters
Installing solar electric equipment (like panels) or wind turbines
Using fuel cell properties that utilize renewable fuels
Adding geothermal heat pumps
Although some conditions of this program lapsed in 2021, there are still certain tax deductions and credits available to homeowners. Here's where you can find more information on the Residential Renewable Energy Tax Credit.
When you make renovations that add value to your home, you can earn non-taxable capital gains when you sell your home later on. Just make sure you keep all receipts so that you have a record of how much you paid and when.
Not only that, but if you recently bought a home and know you want to make major improvements to it right away, you can often roll the expense into your mortgage, allowing you to tap into interest rates and repayment terms that are much lower and much more flexible than what you might find with alternative sources of financing. Again, you can deduct this on your taxes via your mortgage interest deduction.
If your doctor specifically recommends home modifications that can be used for medical purposes – like adding a wheelchair ramp – these expenses can be used as qualifying medical expenses rather than home improvement deductions.

When are home repairs tax deductible?

Home repairs are only tax-deductible if you use a portion of the home as an office for your business.
We discussed this briefly earlier in the post, but let's recap.
To qualify, you must have a legitimate business (one that pays income taxes) and use part of the home exclusively and regularly for the business. If you simply have a desk set up in your living room where you mail out orders to customers once or twice a year, that's probably not going to count.
However, if you have a home office where you work every single day, you can deduct 100% of the cost of repairs you make just to your home office. For instance, if you have a broken window in your home office, you can deduct 100% of the cost to replace it even though that replacement and repair is not increasing the value of your home. Since the office is for your business, that repair is necessary.
Repairing a broken window in your bedroom, though, would not qualify for this deduction.
The other way you can take a tax deduction for a home repair is if you rent out a portion of your home. In that case, you can deduct all or part of the expenses as rental expenses, which will then be deducted from all the rental income you receive.
If you make a repair that benefits the entire home – like fixing the roof or foundation – you can still deduct these as a business owner. However, you won't be able to take the full deduction and you can only take them according to the percentage of rental or business use of the home.

Are home foundation or roof repairs tax-deductible?

Home foundation and roof repairs are tax-deductible in some circumstances.
If the repair adds value – like fully replacing a roof – it would be considered a home improvement. However, making small repairs to the foundation or roof (like replacing old roof shingles) does not count since it only keeps the home in good working order and does not add significant value to it.

How much can you write off for a home office?

If you use one of the rooms in your home as an office, you may be able to get a percentage off that as well. For instance, if you add central air conditioning to your entire home and your office comprises 15% of the rest of your home's space, you can deduct 15% of that total cost. You can find more specific information about that here.
There is another way that you can take a home office deduction, too. The simplest version of this allows you to take $5 per square foot of your home office up to 300 square feet for a maximum $1,500 deduction. Again, the home office needs to only be used for your business.

Can you deduct repairs on a second home?

You can deduct renovations on a second home, even if the property is used as a rental (more on this below). However, you can't deduct repairs.
Second homes fall under these same guidelines for tax deductions as first homes. You can deduct home improvement loan interest for a second home only if it substantially improves the value of the home – and doesn't just return it to its former state.
There is one exception to this – and that is if you own the home as an income-generating facility. If it is a business office or rental property, then you might be able to take advantage of alternative tax deductions for business owners.

Are there tax deductions for rental property home improvements?

If you rent out your entire home or even part of your home, you can deduct in full any improvements that you make to that space. For instance, if you add a bathroom, 100% of the expenses can be written off on your taxes.
However, to qualify for a home improvement loan tax deduction, you do need to live in that rental property for at least a small percentage of time out of the year. The cut-off is that you must spend at least 14 days in the home each year (or 10% of the overall days it is rented, whichever is more).

Are HELOCs tax deductible?

HELOC tax deductions work similarly in terms of what can be deducted and what cannot. The only difference is in how the funds from the loans are allocated. With a home equity loan, you can borrow a lump sum of money over a certain period of time with a fixed interest rate.
With a HELOC, you'll gain access to a fixed line of credit and you can access the funds therein at any time during the draw period (which is usually around 10 years, but this can vary). The interest rates are variable and follow current market rates.

What are the different types of home improvement loans?

There are several different types of home improvement loans you can choose from. These include:
A cash-out refinance – this is when you refinance to a new mortgage loan with a larger balance than what you currently owe, keeping the remaining cash for your home improvements
A FHA 203(k) rehab loan – this bundles the home improvement costs and mortgage into one loan, as discussed earlier in the post
A home equity loan – a home equity loan lets you borrow against the equity you've already built in your home
HELOC – a home equity line of credit lets you borrow from an account up to a pre-approved limit, sort of like a credit card, but for home improvements
Credit card loans – these tend to be the riskiest options since they carry the highest interest rates and least flexible repayment terms
Personal loan or home improvement loan – these tend to be most favorable for small improvements or upgrades since they do not require collateral to secure. They can also be a good option for emergency repairs since the funding process is usually much faster than secured loan options. Personal loans tend to be easy to apply for and quick to receive – great for when you need money quickly. Interest rates and repayment terms on these vary, but you can search a variety of lenders and get preapproved for the best offers here.
So are home improvement loans tax deductible? Absolutely – as long as you stick to the parameters outlined above. However, getting a tax deduction doesn't always make sense. This is why it's important to consult a tax professional to talk about your specific financial situation and whether receiving the deduction is a smart choice for you.
When does it not make sense to get a tax deduction on your home improvement loan? It has to do with your total expenses.
Remember, to get the deduction, you will need to do an itemized deduction on your taxes – taking the standard deduction won't work. The standard deduction can save you money but not if your deductible expenses are higher than the amount of the standard deduction for the given tax year.
You can find the most current numbers here – but again, if your deductible expenses are much less than the standard deduction (including your home improvement expenses) then it makes more sense to take the standard deduction for now.
Again, consult a tax professional for more personalized guidance. And if you do decide that taking out a home improvement loan is right for you – tax deduction or not – be sure to stop by Acorn Finance to find the best deal on your loan. You'll be able to get a personalized rate in less than a minute – with no hit to your credit score – so you can see all the best options that are available to you.