Most home improvements are not tax deductible in the year you pay for them

The IRS treats most home improvements — new kitchen, new roof, deck, siding — as capital improvements that add value to your house. You cannot deduct these costs on your 2023 tax return. Instead, they increase your cost basis, which reduces the taxable gain if you sell the house later.

The one major exception is a home office. If you use a dedicated room or space in your home exclusively for business, you can deduct a portion of your mortgage interest, property taxes, utilities, insurance, and repairs — either using the simplified method ($5 per square foot, up to 300 square feet) or actual expense tracking. This deduction appears on Schedule C if you are self-employed, or on Form 8829 if you run a business as a sole proprietor.

Energy-efficient improvements have a separate path: certain upgrades like insulation, heat pumps, and solar panels may may have access to for a federal tax credit (not a deduction) under the Inflation Reduction Act. A credit reduces your tax bill dollar-for-dollar, which is more valuable than a deduction. The credit is available for improvements made in 2023 and later years.

Key Takeaways

  • Home improvements that add value to your house — roofs, kitchens, decks, siding — increase your cost basis but are not deductible in the year you pay for them.
  • A home office used exclusively for business work qualifies for a deduction using either the simplified method ($5 per square foot) or actual expenses on Form 8829.
  • Energy-efficient improvements like insulation, heat pumps, and solar panels may may have access to for a federal tax credit worth up to 30 percent of the cost under the Inflation Reduction Act.
  • Medical home modifications — ramps, grab bars, widened doorways — may be deductible as medical expenses if they do not add market value to the home.
  • Keep receipts and invoices for all improvements; you will need them to prove your cost basis if you sell the house.

How cost basis works when you sell your house

When you sell your primary residence, the IRS allows you to exclude up to $250,000 in gain if you are single, or $500,000 if you are married filing jointly — but only if you owned and lived in the house for at least two of the five years before the sale. Home improvements you paid for increase your cost basis, which lowers your taxable gain.

Example: You bought the house for $300,000. You spent $50,000 on a new roof, $30,000 on a kitchen remodel, and $20,000 on new siding. Your adjusted cost basis is now $400,000. If you sell for $550,000, your gain is $150,000 — well below the $250,000 exclusion, so you owe no federal tax on the sale.

Repairs and maintenance do not increase cost basis. Replacing a broken window is a repair. Replacing all the windows with new energy-efficient ones is an improvement. The distinction matters: repairs are deductible only if you itemize deductions and they are part of a casualty loss, but improvements add to your basis. Keep invoices that clearly describe the work — "new roof" versus "roof repair" — because the IRS may ask for proof if you are audited.

Home office deduction: simplified method versus actual expenses

The simplified method is easier to track and audit-proof. You multiply the square footage of your dedicated office space (up to 300 square feet) by $5. That is your deduction for the year. You do not need to calculate percentages of your mortgage, utilities, or insurance. You claim it on Form 8829, Expenses for Business Use of Your Home.

The actual expense method requires you to calculate what percentage of your home is used for business, then deduct that percentage of mortgage interest (not principal), property taxes, utilities, insurance, repairs, and depreciation. This method often yields a larger deduction but requires detailed record-keeping and triggers depreciation recapture when you sell the house — meaning you may owe tax on the depreciation you claimed, even if you do not owe tax on the gain itself.

You must choose one method for the first year you claim the deduction. You can switch to the other method in later years, but switching to actual expenses after using simplified method locks you into actual expenses going forward. Most self-employed people use simplified method because it is simpler and avoids depreciation recapture.

Energy-efficient improvements and the federal tax credit

The Inflation Reduction Act expanded the federal tax credit for energy-efficient home improvements. Unlike a deduction, a credit reduces your tax bill directly. A $1,000 credit lowers your tax by $1,000.

Improvements that may may have access to include: insulation, air sealing, heat pumps (heating and cooling), central air conditioning, water heaters, roofs with reflective coatings, doors and windows, and biomass stoves. Solar panels, battery storage, and geothermal heat pumps also may have access to. The credit is up to 30 percent of the cost, with some limits per item and per year.

You claim the credit on Form 5695, Residential Energy Credits. The credit is nonrefundable, meaning it cannot reduce your tax below zero, but you can carry unused credit forward to future years. Some improvements have income limits; check IRS Publication 5695 or the Energy Star website for current rules, as they vary by improvement type and change year to year.

Medical home modifications as a deductible expense

If you install a home modification for medical reasons — a ramp for a wheelchair, grab bars in the bathroom, widened doorways for mobility — you may deduct the cost as a medical expense, but only the portion that does not add market value to the home.

Example: You install a wheelchair ramp that costs $3,000. A real estate appraiser determines the ramp adds $1,500 to your home's resale value. You can deduct $1,500 as a medical expense (on Schedule A, if you itemize). The other $1,500 increases your cost basis instead.

To claim this deduction, you need a letter from your doctor stating the modification is medically necessary, and ideally an appraisal or contractor estimate showing how much value it adds to the home. Medical expenses are deductible only if you itemize deductions and only to the extent they exceed 7.5 percent of your adjusted gross income.

What to keep and what to report on your 2023 return

Save every receipt and invoice for home improvements, even if you do not deduct them in 2023. You will need them if you sell the house, because the IRS may ask for proof of your cost basis. Organize them by year and by type of improvement.

For a home office, file Form 8829 with your Schedule C (self-employed) or your business return. For energy-efficient improvements, file Form 5695 with your 1040. For medical modifications, itemize deductions on Schedule A and report the deductible portion as a medical expense.

If you are unsure whether a specific improvement qualifies, IRS Publication 587 (Business Use of Your Home) covers home office rules, and Publication 5695 covers energy credits. Your tax software will walk you through the forms if you indicate you have a home office or energy improvements.

Frequently Asked Questions

Can I deduct the cost of replacing my roof in 2023?

No. A new roof is a capital improvement that adds value to your home. You cannot deduct it in 2023. Instead, it increases your cost basis. If you sell the house later, the higher basis reduces your taxable gain. If the roof was damaged by a storm and you are claiming a casualty loss, different rules explore — consult a tax professional.

If I use one room in my house for business, do I have to use the simplified method?

No. You can choose the simplified method ($5 per square foot) or the actual expense method. Simplified is easier and avoids depreciation recapture. Actual expenses may give you a larger deduction but requires detailed tracking and creates a tax liability when you sell the house. You pick one method for your first year and can switch later.

Does a new HVAC system may have access to for the energy credit?

A heat pump system qualifies for the federal credit under the Inflation Reduction Act. A traditional air conditioning or furnace replacement does not. The credit covers up to 30 percent of the cost. You claim it on Form 5695. Check the IRS website or Publication 5695 for current income limits and per-item caps, as they vary.

What if I install grab bars for my elderly parent who lives with me — can I deduct that?

Yes, if your parent is your dependent and the grab bars are medically necessary. You deduct the cost as a medical expense on Schedule A (if you itemize), but only the portion that does not add market value to the home. You need a doctor's letter stating medical necessity and ideally an estimate of how much value the bars add.

Do I need to report home improvements on my tax return if I do not deduct them?

No. You do not report improvements on your return unless you are claiming a deduction (home office, medical expense, or energy credit). Keep the receipts for your records in case you sell the house and the IRS asks for proof of your cost basis.