Are Home Improvement Loans Tax Deductible? A 2024 Guide for Homeowners

Are you looking to upgrade your kitchen, get a new roof, finish your basement or add a deck to your backyard? Home improvement projects can be a significant investment, so many homeowners wonder whether they can reap any tax benefits from renovating.

Home improvements can greatly enhance the value and enjoyment of your home However, major renovations often require financing to make them affordable. This raises an important question – are home improvement loans tax deductible?

I did extensive research on the tax implications of financing home renovations. Here is a comprehensive guide on the tax deductibility of home improvement loans

Overview of Home Improvement Loan Options

There are several ways homeowners can finance renovations:

Home Equity Loans – Loans secured by your home’s equity. Interest may be tax deductible if used for home improvements.
HELOCs – Revolving line of credit secured by home equity. Interest may be deductible.
Cash-Out Refinance – Refinance your mortgage and withdraw equity in cash. Interest is deductible.
Personal Loans – Unsecured loans from banks/online lenders. Interest is generally not deductible.
Credit Cards – High interest rates make them unsuitable for major renovations. Interest not deductible.

Are Home Improvement Loans Tax Deductible?

In general, home improvement loans are not tax deductible. However, there are some exceptions:

Home Equity Loans – If used for home improvements that substantially improve the property, interest may be tax deductible.
HELOCs – Interest may be deductible if used for home improvements.
Cash-Out Refinance – Interest is tax deductible as with standard mortgage interest.
Personal Loans – Interest is typically not tax deductible.
Credit Cards – Interest is not tax deductible.

So loans secured against your home, like home equity loans, HELOCs, and cash-out refinances may offer tax benefits if used for renovations. Unsecured loans do not provide the same deductions.

IRS Guidelines for Tax Deductible Home Improvement Loans

The IRS allows homeowners to deduct interest paid on home equity loans and lines of credit used for home improvements, provided certain conditions are met:

The loan must be secured by your primary residence. This includes home equity loans, HELOCs, and cash-out refinances.
Funds must be used for improvements that substantially improve the home. Routine maintenance does not qualify.
Renovations must prolong the property’s useful life or allow new uses. Examples include room additions, remodeling, and energy efficiency upgrades.
Interest deduction caps apply: $750,000 for married filing jointly, $375,000 for single filers.
The home improvement loan deduction is an itemized deduction. You must itemize to claim it.
You can only deduct interest, not the principal loan amount.

Always consult a tax professional to ensure your planned improvements meet the IRS criteria.

Keeping Records for Home Improvement Tax Deductions

To claim tax deductions for home renovations, you must maintain thorough records including:

Receipts for building materials, labor, and project costs
Home improvement contracts and work agreements
Bank and credit card statements showing payments
Loan documents like the Mortgage Interest Statement Form 1098
Building permits, inspection reports, and other municipal documents

Organize these documents by year and renovation project. You may need to provide them as proof if audited. Track home improvements that span multiple years.

Maximizing Tax Deductions from Home Improvement Loans

Follow these tips to make the most of potential tax deductions when financing renovations:

Take out a home equity loan, HELOC, or cash-out refinance rather than an unsecured personal loan.
Use loan proceeds strictly for eligible renovations that improve your home.
Consult a tax pro to ensure improvements qualify according to the latest IRS rules.
Keep immaculate records of all projects, expenses, loan documents and tax forms.
Itemize deductions if total itemized deductions exceed the standard deduction.
Claim deductions promptly in the year renovation expenses are incurred.
Consider energy efficiency upgrades for additional tax credits.

The Bottom Line – Are Home Improvement Loans Tax Deductible?

How To Claim a Home Improvement Tax Deduction

Depending on the type of home improvement tax savings you qualify for, you will need to complete the specific form and calculations per the IRS. We have created a step-by-step guide for those wanting to claim home improvements on their taxes.

What Home Improvements Are Tax Deductible?

Two types of home improvements typically offer some tax benefits: energy-efficient upgrades and medically necessary renovations.

Energy-efficient upgrades may offer substantial tax credits for improvements or renovations to an existing home. Qualifying home renovations may include upgrading exterior doors, windows, skylights and insulation materials or replacing central air conditioners, water heaters or furnaces with more energy-efficient versions.

For these types of upgrades, the IRS offers a tax credit called the Energy Efficient Home Improvement Credit. A tax credit differs from a tax deduction in that it reduces the amount of taxes you owe dollar-for-dollar. For example, if you owe $2,000 in tax, but have a $1,200 tax credit, your tax bill would be reduced to $800. For that reason, tax credits can often be more advantageous than tax deductions.

It should be noted that these credits do not extend to new home construction.

Home renovations that are medically necessary may qualify for a medical expense deduction. If you need to make changes to your home to create a functional space for you, your spouse or a dependent due to medical issues, you may be able to deduct the cost or part of the cost of the renovations from your taxable income.

Below are some of the medically necessary home improvements the IRS allows you to deduct:

Installing entrance or exit ramps.
Widening doorways.
Widening or modifying hallways and interior doorways.
Adding railings, support bars or other modifications to bathrooms.
Lowering kitchen cabinets.
Moving electrical outlets and fixtures.
Installing porch lifts and other forms of lifts.
Modifying fire alarms and smoke detectors.
Altering stairways.
Installing handrails or grab bars.
Changing hardware on doors.
Grading the property to provide access to the residence.

Major home renovations that don’t qualify for these specific tax savings may still be helpful when you sell your property. Per the IRS, “improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.” Adding these improvements to your basis calculations can reduce your tax liability once you’ve sold the property.

Is home improvement loan interest tax deductible?

FAQ

What home improvements are tax deductible IRS?

What Home Improvements Are Tax Deductible? Two types of home improvements typically offer some tax benefits: energy-efficient upgrades and medically necessary renovations.

Are home loan payments tax deductible?

The mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. Homeowners can also claim the deduction on loans for second homes providing that they stay within IRS limits.

Is a home equity loan tax deductible?

Borrowers can deduct their home equity loan interest if they use the funds on the home that serves as collateral. So, whether you borrow a home equity loan to help you buy or build a home, or borrow it after you own the home to make improvements, you may deduct the interest.