Home improvements can be expensive, but they also offer tax-saving opportunities. Many homeowners miss out on these savings because tax rules can feel complicated. This article will show you where you can save and what you need to know before you start your next project.

Claim Mortgage Interest on Renovations

If you itemize deductions, you may deduct mortgage interest on your main home and one other property, like a vacation home, within certain limits. To qualify, you must be legally responsible for paying the mortgage.

How does all that relate to home renovations? Well, there are two primary kinds of mortgage interest debt:

• Acquisition Debt: Money you borrow to buy, build, or significantly improve your home. Current tax law lets you deduct interest on up to $750,000 ($375,000 if married filing separately).
• Home Equity Debt: This is usually money borrowed against your home for purposes other than buying, building, or improving it. Since 2025, you cannot deduct interest on most home equity debt, unless you use it for major home improvements.

If you renovate by building an addition, finishing a basement, or installing a pool, the loan might count as acquisition debt. In this case, you can deduct the interest, as long as you follow the limits.

Adjust Your Tax Basis for Home Improvements

When you sell your home, you may qualify to exclude a large part of your gain from taxes. For a single homeowner, you can exclude up to $250,000. For married couples, the limit is $500,000 if both spouses meet the requirements.

You can add the cost of major improvements to your home’s “basis.” This reduces your taxable gain. For example, if you bought your home for $200,000 and spent $150,000 on improvements, your new basis is $350,000. If you sell your home for $800,000, your gain is $450,000, which is below the $500,000 limit for married filers.

Tip: Keep receipts and records of all home improvements.

 

Deduct Medically Necessary Improvements

If you make a home improvement for medical reasons, you can deduct the cost above the increase in your home’s value. For example, if you install a $25,000 pool for health reasons and it increases your home’s value by $15,000, you can deduct the remaining $10,000 as a medical expense.

Remember, you can only deduct medical expenses above 7.5% of your adjusted gross income.

Claim Energy Credits for Home Improvements

The OBBBA generally limited tax credits for energy-efficient home improvements to qualifying property placed in service (installed, not merely purchased) through December 31, 2025. So, these breaks aren’t available for improvements made in 2026 or later.

However, you may want to inquire with your tax advisor about filing an amended 2025 tax return if you overlooked a credit, claimed too small a credit or failed to include the required information. The IRS generally requires amended returns claiming refunds to be filed within three years after the original return was filed or two years after the tax was paid, whichever is later. The two major credits to ask about are:

1. The Energy Efficient Home Improvement Credit. Under Section 25C of the tax code, eligible taxpayers could receive a 30% tax credit for certain expenses, up to specified limits. These include energy-efficient windows, doors, skylights, insulation materials, heat pumps and home energy audits.

There were no income limits on this credit; instead, the available amount depended on the expense. The maximum annual credit was generally up to $1,200 for certain energy-efficient property costs and home improvements, with a separate annual limit of up to $2,000 for qualified heat pumps, water heaters, and biomass stoves or boilers.

Bear in mind that the credit is nonrefundable, so amending is generally worthwhile only to the extent that the credit can reduce your 2025 income tax liability. You can’t carry forward unused credit amounts.

2. The Residential Clean Energy Credit. Section 25D provided a 30% credit for qualifying renewable energy systems — such as solar electric panels, solar water heaters, fuel cells, wind turbines, geothermal heat pumps and battery storage technology — installed after 2022.

Unlike the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit allows unused credit amounts to be carried forward to future years. So, amending may still be beneficial even if you couldn’t use the full credit against your 2025 tax liability.

Envisioning Savings

Home renovations are often driven by a vision — to beautify a space, to make it more efficient and functional, to allow someone to stay at home longer, or some combination thereof. Taxes probably aren’t the first thing on your mind.

But don’t ignore them. With the right strategies and documentation, you may be able to preserve valuable deductions, reduce future taxable gain or even recover overlooked savings on a previously filed return. Put your tax advisor on your project team.