Home Office Improvements: Tax-Deductible?

If you work from home, you may be able to deduct the costs of certain home improvements from your taxes. The IRS allows you to deduct expenses directly related to maintaining your home office, as well as a portion of certain expenses associated with your home that wouldn't be deductible by the average homeowner.

To qualify for the home office deduction, you must use a specific area of your home exclusively and regularly for your business. This means that the space can't be used for any non-business purposes. For example, using a spare bedroom as both your office and a playroom for your children probably makes you ineligible. There are two exceptions to this rule: if you provide daycare services or use the office for storage of inventory or product samples.

You can determine the value of your home office deduction using one of two methods: the simplified method or the actual expenses method. The simplified method multiplies the square footage of your space by a prescribed rate ($5 per square foot for up to 300 square feet of space). The actual expenses method measures actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses.

Home improvements vs. home repairs

Home improvements and home repairs are two distinct activities that are often confused. Home repairs are activities done to keep a property in good condition, while home improvements are activities done to increase the value of a property.

Home Repairs

Home repairs are not intended to improve a property but to make parts last longer. Repairs are not upgrades but are meant to prolong the life of the original item, amenity, or structure. Repairs include buying and replacing broken appliances, unclogging a drain, patching a worn carpet or roof, and fixing a furnace or air conditioner. Repairs are generally not tax-deductible, but there are some exceptions. Repairs made following a hurricane, tornado, fire, or any other disaster may be tax-deductible. Additionally, if the repair is aimed at accommodating people with disabilities, the cost may be claimed partially or in full as a medical expense.

Home Improvements

Home improvements are upgrades where a full-out replacement is made. Improvements are more expensive than repairs and include roof replacements, bathroom remodels, installing new kitchen appliances, and replacing a water heater. Home improvements can add value to homes in the long run compared to repairs. Improvements are generally not tax-deductible, but there are some exceptions. If the improvement is aimed at accommodating people with disabilities, the cost may be claimed partially or in full as a medical expense. Additionally, if you rent out a portion of your home, the improvement can be depreciated as a rental expense.

Home Office Deduction

If you use a portion of your home as a home office, you may be able to deduct certain expenses. These include direct expenses, such as window treatments installed only in the home office, and indirect expenses, such as insurance, utilities, repairs, security system expenses, and maintenance costs. If you are using the Simplified Method, you are entitled to claim $5 per square foot of home office space.

It is important to understand the differences between home repairs and improvements for tax purposes. While repairs generally maintain the performance, appeal, and function of a home, improvements enhance its functionality, aesthetic look, design, and feel. Repairs are typically not deductible, while improvements can be depreciated over several years. However, there are exceptions to these rules, and it is always a good idea to consult a tax professional for specific advice.

What is a home improvement?

For tax purposes, a home improvement is any work that:

• Substantially adds to the value of your home
• Increases its useful life
• Adapts it to new uses

Some examples of home improvements include:

• Plumbing upgrades
• Building a deck
• Adding a swimming pool

Home improvements are not tax-deductible if you use your home purely as your personal residence. However, they can help reduce the amount of taxes you have to pay when you sell your home. The cost of home improvements is added to the tax basis of your home. Basis means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll get when you sell your home.

Home improvements can be depreciated if you use a portion of your home other than as a personal residence. You can depreciate the cost of improvements made to your home office, for example, by deducting the entire cost as a business expense. Improvements that benefit your entire home can be depreciated according to the percentage of home office use.

Can you deduct home improvements?

Home improvements can be expensive, but they may provide tax benefits when you sell your home. However, you cannot deduct the cost of home improvements in the year you make them.

Home improvements are defined as any work that:

• Substantially adds to the value of your home
• Increases its useful life
• Adapts it to new uses

Examples of home improvements include plumbing upgrades, building a deck, and adding a swimming pool.

If you use your home purely as your personal residence, you cannot deduct the cost of home improvements. These costs are non-deductible personal expenses. However, home improvements can help reduce the amount of tax you have to pay when you sell your home at a profit.

The cost of home improvements is added to the tax basis of your home. The "basis" refers to the amount of your investment in your home for tax purposes. A higher basis means a lower profit when you sell your home.

Although you cannot deduct home improvements, it is possible to depreciate them in some situations. "Depreciation" means that you deduct the cost over several years—anywhere from three to 27.5 years.

To qualify to depreciate home improvement costs, you must use a portion of your home other than as a personal residence.

Deducting Improvements with the Home Office Deduction

If you have a business and use a portion of your home exclusively and regularly as an office for that business, you may qualify for the home office deduction, which allows you to depreciate 100% of the cost of improvements made just to your home office. Improvements that benefit your entire home can be depreciated according to the percentage of home office use.

Deducting Improvements as a Rental Property Owner

Another way to depreciate home improvement costs is to rent out a portion of your home. This enables you to depreciate the expense as a rental expense, deducted from the rental income you receive. Improvements that benefit only the rented portion of the home can be depreciated in full, while improvements that benefit the entire home can be depreciated according to the percentage of rental use of the home.

Repairs are things you do to fix an existing part of your home and do not substantially add to its value, increase its useful life, or adapt it to new uses. Repairs to your personal residence are not tax-deductible and do not increase the basis of your home. However, if you have a tax-deductible home office, repairs are deductible. Repairs just to your home office or a rented room are 100% deductible, while the cost of repairs that benefit your entire home must be allocated according to the percentage of rental or home office use.

Can you depreciate improvements to your home?

Yes, it is possible to depreciate improvements to your home in some situations. To qualify for depreciation, you must use a portion of your home other than as a personal residence. There are two ways to do this:

• Home Office Deduction: If you have a legitimate business and use part of your home exclusively and regularly for that business, you can depreciate the cost of improvements made specifically to your home office. For example, if you use a bedroom as a home office and install built-in bookshelves, you can depreciate the entire cost as a business expense. Improvements that benefit your entire home can be depreciated according to the percentage of home office use.
• Renting Out a Portion of Your Home: If you rent out a portion of your home, you can depreciate the cost of improvements as a rental expense, deducted from the rental income you receive. Improvements that benefit only the rented portion can be depreciated in full, while improvements that benefit the entire home can be depreciated according to the percentage of rental use.

Deducting improvements if you qualify for the home office deduction

If you qualify for the home office deduction, you can deduct the costs of certain home improvements. The IRS defines a home improvement as any work that substantially adds to the value of your home, increases its useful life, or adapts it to new uses.

Home improvements that benefit your entire home are depreciable according to the percentage of home office use. For example, if you use 20% of your home as an office, you may depreciate 20% of the cost to upgrade your home heating and air conditioning system.

Improvements that are made exclusively to your home office can be depreciated in full. For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, you may depreciate the entire cost as a business expense.

If you are a renter, you can still take advantage of these tax deductions. However, you can only depreciate the costs of improvements that benefit your home office. This is because improvements that benefit your entire home need to be depreciated, which you cannot do if you do not own the home.

Frequently asked questions