Are Home Renovations Tax Deductible? Capital Improvements, Basis and the Exceptions
How the IRS treats a kitchen, bathroom or gut renovation: why improvements to your own home are not deducted but raise your cost basis, medically necessary changes, rentals, home equity interest, and NJ and NY sales tax.
Short answer
For your own home, a kitchen or bathroom renovation is generally not deductible in the year you pay for it. Instead, under IRS Publication 523, improvements that add value, prolong the home’s life or adapt it to new uses increase your cost basis, which reduces taxable gain when you sell, on top of the exclusion of up to $250,000 of gain ($500,000 for married couples filing jointly) for a qualifying main home. The main exceptions are medically necessary improvements, rental property, and interest on a home equity loan used to substantially improve the home. In New Jersey and New York, capital improvement certificates also keep sales tax off the contractor’s labor.
This is a builder’s summary of the rules homeowners ask us about most, with links to the IRS publications. It is not tax advice; your accountant should confirm how they apply to you.
Your own home: improvements go into basis, not deductions
The IRS does not let you deduct the cost of improving or repairing a personal residence. What it does let you do is add the cost of improvements to the home’s basis: roughly, what you paid for the home plus what you have put into it. When you sell, gain is measured against that adjusted basis, so a higher basis means a smaller gain.
Publication 523 defines improvements as work that adds to the value of your home, prolongs its useful life or adapts it to new uses. Its examples include:
| Counts as an improvement (adds to basis) | Does not count |
|---|---|
| Kitchen modernization, built-in appliances, flooring | Painting, fixing leaks, filling cracks, replacing broken hardware |
| Adding a bathroom, bedroom, deck or porch | Improvements no longer in the home, such as carpet you installed and later replaced |
| Heating system, central air, ductwork, water heater | Items with a life expectancy of less than one year when installed |
| New roof, siding, storm windows, insulation, wiring, plumbing | Routine maintenance that keeps the home in good condition |
One detail favors full renovations. Publication 523 says repair-type work counts as an improvement when it is done as part of an extensive remodeling or restoration. Replacing one broken windowpane is a repair; replacing the same window as part of replacing all the windows is an improvement. In a gut renovation, patching, painting and similar items can therefore be part of the improvement cost.
Basis is also reduced by certain things, including energy credits and subsidies you received for the work. If you claimed a federal energy credit before it ended, or received a utility rebate, ask your accountant how it affects basis.
When basis actually matters
If you sell your main home and meet the ownership and use tests (generally, you owned and lived in it for at least two of the five years before the sale), you can exclude up to $250,000 of gain, or $500,000 for married couples filing jointly. Many owners never exceed that, and the improvement records never matter. They matter more than people expect in the NJ and NYC markets:
- Long-held homes in high-appreciation areas. A Hoboken rowhouse or a Brooklyn brownstone bought decades ago can carry gains well beyond the exclusion.
- Second homes and homes that no longer qualify for the full exclusion, for example because you moved out years before selling.
- Rentals and converted properties, where depreciation and basis drive the tax on sale.
Keep every contract, invoice, change order and proof of payment, plus permits and sign-offs, for as long as you own the property and for several years after the sale. A clear scope from your contractor that separates improvements from repairs makes this much easier. See how to read a renovation estimate.
Medically necessary improvements
Publication 502 allows certain home improvements to be included in medical expenses when their main purpose is medical care for you, your spouse or a dependent. Two rules apply:
- Value test. If the improvement increases the value of the home, only the part of the cost that exceeds the increase in value counts.
- Accessibility changes. Changes made to accommodate a person with a disability generally do not increase the home’s value, and the IRS says their cost can be included in full. Examples include entrance ramps, widening doorways and hallways, installing railings, support bars or other modifications to bathrooms, lowering or modifying kitchen cabinets and equipment, and moving outlets and fixtures.
Medical expenses are deductible only if you itemize, and only the amount above 7.5% of adjusted gross income. For a curbless shower, grab bars, a wider bathroom door or a lowered vanity, keep a note from the physician and separate invoices for the accessibility items. See our aging-in-place bathroom guide.
Rental property: repairs deducted, improvements depreciated
If you renovate a unit you rent out, Publication 527 applies. Repairs and maintenance are generally deductible in the year paid. Improvements, meaning betterments, restorations or adaptations to a new use, are capitalized and depreciated; residential rental property is depreciated over 27.5 years under the general system. A new kitchen in a two-family rental is normally an improvement. Owner-occupied two-to-four family houses, common in Jersey City, Hoboken and Queens, need costs split between your unit and the rental units. See renovating a rental property in New Jersey.
Interest on renovation loans
Publication 936 says interest on a home equity loan or line of credit is deductible only if the borrowed funds are used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Total qualifying mortgage debt is limited to $750,000 ($375,000 if married filing separately), with higher limits for debt incurred before December 16, 2017. A HELOC used for a kitchen renovation can qualify; the same HELOC used to pay off a car loan does not. Keep records tracing the loan proceeds to the contractor.
Energy credits ended after 2025
The federal Energy Efficient Home Improvement Credit (25C) and Residential Clean Energy Credit (25D) are not available for work completed in 2026. Utility rebates continue under their own terms; see our New Jersey and New York City incentive guides.
Sales tax: the immediate saving
Both states exempt the contractor’s charge for capital improvements from sales tax when the owner provides the right certificate: Form ST-8 in New Jersey and Form ST-124 in New York. The contractor pays tax on materials and includes it in the price. Repairs, maintenance and freestanding appliances are taxable. On a typical full kitchen or bathroom remodel, this is often the largest tax saving in the whole project, and it applies in the year you build rather than when you sell.
A simple record-keeping routine
- Ask your contractor for a contract and final invoice that describe the scope, so improvements are easy to identify.
- Pay by check or bank transfer, not cash.
- Keep permits, final inspections and sign-offs with the invoices.
- Keep separate invoices for medical accessibility items and for any rental units.
- Store everything with your closing documents for the house.
To plan a renovation in New Jersey or New York City, see our kitchen renovation page or start a project brief.
Frequently asked questions
Can I deduct a kitchen remodel on my taxes?
Not for your own home. The cost of improvements generally increases your home's basis, which reduces taxable gain when you sell. Rentals and medically necessary improvements are treated differently.
What home improvements increase cost basis?
IRS Publication 523 lists additions, kitchen modernization, built-in appliances, flooring, heating and air conditioning, a new roof, insulation, wiring, plumbing and similar work that adds value, prolongs the home's life or adapts it to new uses. Repairs and maintenance do not, unless done as part of an extensive remodeling.
Are bathroom grab bars and ramps tax deductible?
They can be included in medical expenses under IRS Publication 502 when their main purpose is medical care. Accessibility changes for a person with a disability generally can be included in full. You must itemize, and only medical expenses above 7.5% of AGI are deductible.
Is HELOC interest deductible for a renovation?
Under IRS Publication 936, yes if the loan is secured by the home and the funds are used to buy, build or substantially improve it, you itemize, and total qualifying debt is within the limits.
Do I pay sales tax on renovation labor in NJ or NY?
Not on capital improvements, if you give the contractor Form ST-8 in New Jersey or Form ST-124 in New York. The contractor pays tax on materials.
Sources & further reading
- IRS Publication 523: Selling Your Home
- IRS Publication 502: Medical and Dental Expenses
- IRS Publication 527: Residential Rental Property
- IRS Publication 936: Home Mortgage Interest Deduction
- IRS Publication 530: Tax Information for Homeowners
- NJ Division of Taxation: Form ST-8, Certificate of Exempt Capital Improvement
- NYS Department of Taxation and Finance: Capital Improvements tax bulletin
Costs are 2026 planning ranges for the New Jersey and New York City market, not quotes. Rules summarized here change and vary by building and municipality; confirm requirements with your local building department, building management or attorney before you start.