What Home Improvements Can Be Deducted From Capital Gains Tax?

Home improvements that qualify as capital improvements can be added to your home’s cost basis, which lowers the taxable profit when you sell. The IRS doesn’t let you deduct these costs directly the way you’d deduct mortgage interest. Instead, additions, whole-system replacements, new roofing, landscaping, and other lasting changes raise the number you subtract from your sale price when calculating gain. Routine repairs and the value of your own labor don’t count. And for most sellers, none of this affects the tax bill at all: the Section 121 exclusion already shields up to $250,000 of gain for single filers and up to $500,000 for married couples filing jointly on a primary residence.¹ Improvements matter for taxes when your gain runs past those thresholds — or when you want to build a cushion in case it does.

Why Basis Matters Before You Worry About Improvements

Your taxable gain is the sale price, minus selling expenses, minus your adjusted basis. Adjusted basis starts with what you paid for the home, adds qualifying closing costs and capital improvements over the years, and subtracts items like depreciation claimed for a home office or a casualty loss deduction. If the resulting gain sits under your Section 121 exclusion, you owe nothing. If it doesn’t, every qualifying improvement dollar shaves a dollar off the taxable amount.

To use the exclusion, you must have owned and lived in the home for at least two of the five years before the sale, and you can only claim it once every two years.² Improvement records are worth keeping regardless. Home values can move, exclusion thresholds have not changed in decades, and a project you did years ago is worthless at sale if you can’t document it.

What Counts as a Capital Improvement

The IRS applies a three-part test. A capital improvement either adds value to the property, extends its useful life, or adapts it to a different use.³ Costs that meet that test are added to basis. Costs that simply keep the home in its current working condition are repairs, and repairs don’t count.

The same physical work can land on either side depending on scope. Replacing a few broken window panes is a repair. Replacing every window in the house as one project is an improvement. Patching a section of roof is a repair. A new roof is an improvement. Repainting a scuffed room is a repair, but the same paint job as part of a full kitchen renovation counts as part of that improvement.⁴

That last point is easy to miss. Repair-type work bundled into a larger renovation or restoration project gets treated as part of the capital improvement. If you gut and remodel a bathroom and the job includes fixing a leak that would otherwise be a repair, the whole cost goes into basis.⁴

Qualifying Improvements by Category

IRS Publication 523 groups the main categories of qualifying work. Projects don’t always fit neatly into one bucket, but these are the recognized areas.

Additions and Structural Changes

Adding a bedroom, bathroom, garage, porch, or deck permanently expands the home. Finishing an unfinished basement or attic converts raw space into living area. These are the clearest capital improvements because they change the physical footprint of the house.⁴

Heating, Plumbing, and Mechanical Systems

Whole-system work qualifies: a new furnace, central air conditioning, ductwork, water heater, septic system, soft water system, or whole-house water filtration. Upgrading electrical wiring, adding a built-in security system, and installing a central vacuum or lawn sprinkler system are on the list too.⁴ The rule is that you’re installing or replacing an entire system, not fixing a component.

One-time local government assessments for water connections, sidewalks, or road work also increase basis, even though you didn’t choose the project. Ongoing maintenance charges and any interest on the assessment do not.⁵

Exterior and Insulation

A new roof, new siding, storm windows and doors, and satellite dishes qualify. So does adding insulation to attics, walls, floors, or around pipes and ductwork.⁴

Landscaping and Outdoor Structures

Permanent outdoor work counts: landscaping, a new driveway or walkway, a fence, retaining walls, and swimming pools. The change has to be lasting. Mowing, hedge trimming, and other recurring yard work is maintenance.⁴

Interior Improvements

Kitchen modernization, new flooring, wall-to-wall carpeting, built-in appliances, and adding a fireplace all qualify. The improvement has to still be part of the home when you sell. Carpeting you installed and later tore out doesn’t count.⁴

What Doesn’t Qualify

Three categories catch homeowners off guard.

Routine repairs and maintenance. Painting, fixing leaks, filling cracks, and replacing broken hardware preserve current condition rather than add value or extend life, so they stay out of basis.⁴

Your own labor. If you do the work yourself, only the materials cost gets added to basis. The IRS explicitly excludes the value of your own labor, or any unpaid labor, from the basis of property you build or improve. A DIY kitchen job with $15,000 in materials and 200 weekend hours produces a $15,000 basis increase.⁵

Improvements no longer part of the home. If you installed carpeting in 2015 and replaced it with hardwood in 2022, only the hardwood counts at sale. Anything with a useful life under one year at installation is also out.⁴

Restoration After a Casualty

Fire, storm, and similar damage create an exception to the repair rule. Money you spend restoring the home to its pre-damage condition increases basis, after subtracting any insurance reimbursement.⁶ If the restoration also upgrades the damaged area beyond what was there before, the upgrade portion counts as an ordinary capital improvement.

Energy Credits Reduce Your Basis Increase

Federal energy tax credits carry a catch. If you claimed a credit for a qualifying improvement, your basis increase for that project is reduced by the credit amount. Both the Energy Efficient Home Improvement Credit under Section 25C — covering efficient windows, doors, insulation, and HVAC — and the Residential Clean Energy Credit under Section 25D — covering solar, battery storage, and similar systems — require this reduction.⁷⁸

Spend $12,000 on a heat pump and claim a $2,000 credit, and your basis goes up by $10,000, not $12,000. The IRS requires you to keep records of the reduction for as long as your basis is relevant to your taxes.⁹

Home Office Depreciation Cuts the Other Way

If you used part of the home as a business office and claimed depreciation, those deductions reduce your basis and increase your taxable gain at sale. You have to reduce basis by the greater of the depreciation actually claimed or the amount you were entitled to claim, even if you underreported it. The gain attributable to depreciation is taxed at a maximum rate of 25%.¹⁰

One exception: if you used the simplified home office method (the $5-per-square-foot option), depreciation is treated as zero, and your basis is not reduced.¹⁰

Closing Costs and Selling Expenses Also Move the Number

Improvements aren’t the only lever. Certain purchase-side closing costs get added to your original basis: abstract and title search fees, owner’s title insurance, legal fees for the deed and sales contract, recording fees, survey fees, transfer or stamp taxes, and utility installation charges. Appraisal fees, mortgage insurance premiums, and points on your own loan do not.⁴

On the sale side, real estate commissions, advertising fees, legal fees, and any mortgage points or loan charges you paid that were normally the buyer’s responsibility reduce your amount realized. Those come off the sale price before you calculate gain.⁴

How the Math Runs

Take a married couple who bought a home for $350,000 and paid $6,000 in qualifying closing costs. Over the years, they spent $80,000 on a new roof, a kitchen renovation, a finished basement, and a new HVAC system. They claimed a $1,500 energy credit on the HVAC. Adjusted basis: $350,000 + $6,000 + $80,000 − $1,500 = $434,500.

They sell for $850,000 and pay $51,000 in commissions and other selling costs. Gain: $850,000 − $51,000 − $434,500 = $364,500. That sits under the $500,000 married exclusion, so no capital gains tax is owed.¹ Without the improvements and closing costs, the gain would have been $449,000 — still under the exclusion, but close. A single filer with the same numbers would face $114,500 of taxable gain, and each qualifying improvement dollar would directly reduce that amount. High earners with taxable gain above the exclusion may also owe the 3.8% Net Investment Income Tax on the excess; excluded gain is not subject to it.¹¹

Keep the Paper

None of this works without proof. For each project, keep records showing the date completed, a description of the work, who performed it, and the total cost broken into materials and labor. Receipts, contractor invoices, signed contracts, and canceled checks all qualify.⁴

Retention runs longer than most people expect. You need improvement records until the statute of limitations closes for the year you sell — not the year you did the work. That’s usually at least three years after filing the return for the year of sale, or six years if you underreported income by more than 25%.¹² A 2010 roof receipt with a 2026 sale means holding that paper until at least 2029. Paper fades; a scan in cloud storage doesn’t. And if you claimed any energy credits, keep the basis-reduction records for as long as the property’s basis remains relevant.⁹

1
Internal Revenue Service. Sale of Your Home
2
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
3
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
4
Internal Revenue Service. Publication 523, Selling Your Home
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Internal Revenue Service. Publication 551, Basis of Assets
6
Internal Revenue Service. Publication 547, Casualties, Disasters, and Thefts
7
Office of the Law Revision Counsel. 26 U.S. Code 25C – Energy Efficient Home Improvement Credit
8
Office of the Law Revision Counsel. 26 U.S. Code 25D – Residential Clean Energy Credit
9
IRS.gov. Updates to Frequently Asked Questions About the Energy Efficient Home Improvement Credit and the Residential Clean Energy Property Credit
10
Internal Revenue Service. Depreciation and Recapture 3
11
Internal Revenue Service. Net Investment Income Tax
12
Internal Revenue Service. How Long Should I Keep Records