What Home Improvements Are Tax Deductible When Selling?

Home improvements are not tax deductible in the year you make them, but they can cut the tax you owe when you sell. Qualifying capital improvements get added to your home’s cost basis, which is the IRS’s running total of what you have invested in the property. A higher basis means a smaller capital gain at sale, and a smaller gain means less tax. Whether that matters depends on how much profit you expect and whether it clears the Section 121 exclusion, which shields up to $250,000 of gain for single filers and $500,000 for married couples filing jointly.¹

What Counts as a Capital Improvement

The IRS draws a firm line between improvements and repairs. An improvement makes the property better than it was, brings it back from a state of disrepair, or adapts it to a different use. A repair just keeps things running the way they already were.² Only improvements get added to your basis.

Replacing an entire roof is an improvement because you have installed a major new component. Patching shingles after a storm is a repair because you are restoring the roof to its existing condition. A new central air system, a new deck, a full window replacement, or a new water heater all qualify as improvements. Fixing a leaky faucet, repainting one room, or replacing a cracked windowpane does not.

Outdoor work follows the same logic. Retaining walls, fences, patios, and permanent irrigation systems are capital improvements because they add something new and lasting. Mowing, hedge trimming, and swapping out a few dead shrubs is routine maintenance.

Large projects can blur the line. If you gut and remodel a kitchen, the incidental repairs along the way (patching drywall, fixing a sticky cabinet hinge) get folded into the total improvement cost. The IRS treats a comprehensive remodel as a single improvement rather than a bundle of small repairs. What you cannot do is time routine maintenance to a renovation and call it part of the project. The work has to belong to the same overall scope.

One rule catches sellers off guard: improvements you add to your basis must still be part of the home when you sell. If you installed wall-to-wall carpeting in 2015 and ripped it out for hardwood in 2022, only the hardwood counts. The carpeting cost is gone.³

Common Improvements That Qualify

Additions: extra rooms, a garage, a deck, a porch, a patio
Systems: new HVAC, furnace, central air, water heater, or ductwork
Exterior: new roof, new siding, replacement windows, storm doors
Interior: kitchen or bathroom remodels, new flooring, built-in appliances
Plumbing and electrical: new septic system, water filtration, rewiring, panel upgrades
Landscaping: retaining walls, permanent fencing, driveways, in-ground sprinkler systems

Spending That Doesn’t Qualify

A few categories look eligible but are not:

Your own labor. You can add the cost of materials, permits, and any subcontractors you hired, but not a dollar for your time.⁴
Improvements no longer in the home at sale, as with the ripped-out carpet above.³
Routine maintenance: painting, caulking, cleaning gutters, servicing HVAC, replacing worn weatherstripping.
Standalone repairs unrelated to a larger project, such as snaking a clogged drain or swapping out a broken garbage disposal.

How Improvements Actually Cut Your Tax

Your adjusted basis starts with what you paid for the home, plus certain purchase closing costs (title insurance, legal fees, recording fees, transfer taxes, survey fees).³ Add every qualifying capital improvement you made during your ownership. If you claimed depreciation on any part of the home (for a home office or rental use, for example), you subtract that amount.⁴

At sale, your taxable gain equals the sale price, minus selling expenses (agent commission, advertising, legal fees for the sale, transfer taxes at closing), minus your adjusted basis.³

A worked example: you buy for $300,000, spend $15,000 in qualifying closing costs, and add $60,000 in improvements over the years. Your adjusted basis is $375,000. Sell for $800,000 with $48,000 in selling costs, and your gain is $377,000.

Now the exclusion. To take the full Section 121 exclusion, you must have owned the home for at least two of the five years before the sale, and lived in it as your primary residence for at least two of those same five years. The two years do not need to be consecutive.⁵ If your gain fits under the $250,000 or $500,000 cap, the whole profit is tax free and improvement tracking is less urgent, though still worth doing in case values jump before you sell.

Improvements start earning their keep when the gain crosses the exclusion. A married couple with a $600,000 gain would owe tax on $100,000 above the $500,000 threshold. Document $60,000 in improvements and the gain drops to $540,000, cutting the taxable amount to $40,000. At a 15% long-term capital gains rate, that saves $9,000 in federal tax. Rates on the taxable portion run from 0% to 20% depending on income, with most filers in the 15% bracket.⁶

One boundary worth naming: none of this makes an improvement deductible in the year you spend the money for a personal residence. The benefit only shows up at sale, and only if you have a taxable gain to reduce.

Energy Credits Reduce What You Can Add

Federal energy credits reward upgrades like heat pumps, insulation, new windows, and high-efficiency water heaters. The Energy Efficient Home Improvement Credit covers 30% of qualifying costs, up to $1,200 per year for most improvements and $2,000 per year for heat pumps and biomass stoves, available annually through 2032 with no lifetime cap.⁷

If you claim the credit, you must reduce the home’s basis by the credit amount.⁸ Install a $10,000 heat pump and claim a $2,000 credit, and only $8,000 gets added to basis. The credit is still the better deal — $2,000 off your current tax bill outweighs a $2,000 basis bump that might save $300 in capital gains tax years later. Track the expense and the credit separately so the math is clean at sale.

Records You Need to Keep

The burden of proving basis falls entirely on you. Any improvement cost you cannot document, the IRS will disallow, and your taxable gain goes up accordingly.

For every project, hold on to:

Itemized receipts and invoices from suppliers and contractors
Signed contracts describing the scope of work
Proof of payment: canceled checks, bank statements, credit card records that match the invoices
Building permits, which help establish timing and code compliance

Keep your original purchase closing statement to prove your starting basis, and the final closing statement from your sale to document selling expenses.

The IRS generally has three years to audit a return, stretching to six years if you underreport income by more than 25%.⁹ But a home sale’s basis calculation can reach across decades of ownership, so the practical rule is different: keep improvement records for as long as you own the home, plus at least three years after you file the return that reports the sale.¹⁰ A dedicated folder, physical or digital, that you update with every project is far easier than trying to reconstruct twenty years of receipts the year you list the house.

1
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
2
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
3
Internal Revenue Service. Publication 523 (2025), Selling Your Home
4
Internal Revenue Service. Publication 551, Basis of Assets
5
eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. Home Energy Tax Credits
8
Internal Revenue Service. Instructions for Form 5695 (2025)
9
Internal Revenue Service. Time IRS Can Assess Tax
10
Internal Revenue Service. IRS Audits