Yes, significant home improvements can reduce capital gains tax by increasing your home's "cost basis". By adding the cost of improvements to your original purchase price, the taxable profit upon selling is lowered. Eligible improvements must add value, prolong life, or adapt the home to new uses (e.g., new roof, kitchen remodel).
Capital improvements are projects that extend a home's life, add value or refit a home for new uses. These differ from home repairs, which are part of property maintenance but don't necessarily add value (like fixing a leak). There are some limitations to the types of eligible improvements.
Only capital improvements that enhance the asset's value or extend its life are deductible from a capital gain. Revenue expenses are dealt with through your income tax bill – see our guide here. Examples of landlord's capital improvements are: adding an extension to a property.
Energy-efficient home improvements
Under the Inflation Reduction Act, homeowners can claim a deduction of up to 30% of the cost of qualifying energy-efficient home improvements, including such energy-efficient home improvements as windows, insulation, heat pumps, and energy audits.
When selling a house, you can deduct the cost of capital improvements (like additions or new roofs), selling expenses (commissions, legal fees), and certain closing costs (title fees, recording fees) from your gain, plus you can potentially exclude up to $250,000 (or $500,000 jointly) of the remaining gain if it was your main home for two of the last five years, according to IRS Publication 523.
Capital improvements include: Additions, such as a new bedroom, bathroom, porch or patio. Remodeling existing space such as updating a kitchen or finishing a basement. Replacing siding, roof or windows.
Most home improvements aren't immediately tax deductible as personal expenses, but capital improvements (adding value, prolonging life, new use) increase your home's cost basis, reducing taxes when you sell; specific energy-efficient upgrades and medically necessary changes can offer tax credits or deductions now, and home office or rental property improvements have separate rules.
The "6-year rule" for Capital Gains Tax (CGT) in Australia allows you to treat a former main residence as tax-exempt for up to six years after you move out, even if you rent it out, enabling you to avoid CGT on any growth during that period. You qualify by moving out, choosing to treat it as your main home for tax, and can reset the rule by moving back in. If you rent it out for longer than six years, only the portion of the gain after the six-year mark becomes taxable.
Avoid These Mistakes When DIYing Home Improvement Projects
For most homeowners, standard kitchen renovations for personal use are not fully tax-deductible. However, there are specific scenarios, such as modifying your kitchen for a home office, rental property, or medical necessity, where some costs may qualify for deductions or credits.
Home renovations are not usually tax-deductible in Canada. But if you're helping a family member, improving accessibility, or adding a secondary suite, Canada home improvement tax credit programs can help. Always keep receipts and check program eligibility guidelines.
Landscaping improvements that enhance the value or useful life of a property are typically considered capital improvements rather than deductible expenses. Capital improvements are added to the cost basis of the property and may be depreciated over time, rather than deducted in the year they are incurred.
The biggest tax mistakes people make include filing late, math errors, incorrect personal info (like Social Security numbers), forgetting deductions/credits (like EITC), misreporting income, not signing forms, and making errors with bank details for direct deposit, all leading to delays, penalties, or missed savings, with using tax software or professionals helping avoid these common pitfalls.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
From the proceeds value (or deemed proceeds value), you should deduct the allowable costs, which include the original purchase price, enhancement expenditure (such as capital improvements) and incidental costs of acquisition and disposal (such as legal fees, surveyor fees, stamp duty land tax and estate agent fees).