Are Home Renovation Loans Tax Deductible? What You Should Know

Generally, you can’t directly deduct the cost of home renovation projects from your taxable income. However, in some cases, you may be able to deduct the interest paid on the loan if the home upgrades meet specific guidelines set by the Internal Revenue Service (IRS).

It’s easy to mix up home renovation loans with home loans that qualify for tax deductions. To help you understand the differences, this guide explains when home renovation loan interest can be tax-deductible, the types of loans that qualify, and the specific IRS requirements you need to meet. 

We’ll also provide tips on how to keep proper records for your home renovation projects and how RenoFi can help.

What Are Home Renovation Loans?

Home renovation loans are a type of financing that helps you, as a homeowner, pay for extensive projects that may involve significant structural changes or rebuilding parts of your home. These loans usually exceed $75,000 and are often secured by your home, which means they are backed by your property. This can help you get lower interest rates compared to loans that aren’t secured.

It’s important to note that home renovation loans are different from home improvement loans. Home improvement loans are usually for smaller projects, typically under $75,000, that enhance your home’s look or functionality without major structural changes. These can often be unsecured personal loans, meaning you don’t need to put up your home as collateral.

With a home renovation loan, you typically receive the full amount as a lump sum right at the start. This lets you pay for your renovation project upfront. You’ll pay it back in monthly installments that cover both the principal and interest over the loan term, which can last anywhere from 5 to 30 years. 

Interest rates can range from as low as 3% to as high as 12%, depending on market conditions as well as the lender and your credit score. Plus, many of these loans come with fixed interest rates, so your monthly payments stay the same throughout the loan period.

Where Can You Get a Home Renovation Loan?

There are many ways to finance a home renovation: smaller home improvement projects are often financed using an unsecured personal loan. Larger projects can be financed using home equity loans or RenoFi loans. There are also several government backed programs for construction loans. If you are considering doing a home renovation project, find out the loan options available to you here. 

Difference Between Home Renovations and Home Repairs

When it comes to making changes to your home, it’s important to know the difference between renovations and repairs, especially if you’re considering tax deductions. Although many homeowners use “home improvement” as a general term for upgrading their homes, IRS guidelines clearly differentiate renovations from repairs.

In a nutshell, home renovations are major changes that increase your home’s value or function. For example, when you upgrade your kitchen or add a new room to your home. Some renovations may qualify for tax benefits, especially if they:

• Improve the value of your home: such as adding a feature that makes your home worth more, like building a new bathroom.
• Change its use: for example, converting your garage to a living space.
• Restore a significant part of the property: for instance, replacing the entire roof.

On the other hand, home repairs are routine fixes to keep your home in good condition. For example, fixing leaky faucets, replacing broken window panes, or repainting your home. While these are necessary upkeep, they are mainly for aesthetics and generally aren’t tax deductible.

Tax-Deductible Home Renovations

Besides major renovations, you might qualify for other tax breaks, including:

Medical-Related Home Renovations

You could get tax deductions if you’re making your home more accessible for medical reasons. Costs for changes such as ramps, wider doorways, or support bars may be deductible as long as they boost your home’s value.

For instance, redoing a bathroom for yourself, your spouse, or someone in your household with mobility issues or setting up a special space for medical equipment could qualify. That said, if the renovation doesn’t add much to your home’s worth, it won’t count for a tax break.

To learn more about qualifying medical-related home renovations, check out this IRS page.

Home Office Renovations

With more people working from home, it’s common to set up a dedicated home office space. If you use a part of your home exclusively and regularly for business, you might be able to deduct some of the costs related to renovating that area. This could include things like:

• Ergonomic Furniture: Upgrading your chair, desk, or other office essentials to make your workspace more comfortable and efficient.
• Technology Installations: Installing specialized lighting, electrical systems, or other tech upgrades to support your business needs.
• Structural Changes: Making changes to your home to create a more functional workspace, like adding shelving or storage. However, it’s important to check with a tax professional about these changes. Sometimes, they might be considered improvements to your property rather than business expenses.

Some of these upgrades can be written off as business expenses if you qualify. But don’t forget to keep accurate records of your expenses so you can prove your claims.

Energy-Efficient Upgrades

Besides helping the environment, making your home more energy-efficient can also earn you tax credits for your efforts. The IRS offers credits for installing:

• Solar panels
• Solar water heaters
• Geothermal heat pumps
• Energy-efficient doors and windows

These credits directly reduce your tax bill. Unlike tax deductions that lower your adjusted gross income, tax credits reduce what you owe dollar for dollar.

Home Loans That Qualify for Tax Deductions

When looking for a home loan, remember that only loans that use your home as collateral can qualify for tax interest deductions. If you’re looking to finance a specific renovation and want to explore tax-deductible options, a home equity line of credit (HELOC) or a home equity loan could be a good fit.

Home Equity Line of Credit (HELOC)

A HELOC lets you take out funds backed by your home’s equity — the portion you’ve already paid off through the mortgage. But instead of getting a lump sum, you can take out the amount you need when you need it. This flexibility makes HELOCs a great option for ongoing home improvement projects. The interest on these loans can be tax-deductible if you use them for eligible improvements.

Home Equity Loans

Like HELOCs, home equity loans let you borrow against the equity you’ve built up in your home. These loans usually come with fixed interest rates and repayment terms of up to 30 years, but you can choose a repayment plan that works best for you.

The amount you can borrow depends on your lender and how much equity you have built up over time. Most lenders cap the amount at 80% to 85% of the home’s value. If you use the loan for substantial home renovations, you might be able to deduct the interest on your taxes, even if only part of the loan goes toward the renovation.

Benefits of RenoFi

While a traditional 80% to 90% LTV HELOC may sound like a viable option to fund a home renovation project, it often doesn’t work because the available equity isn’t enough to tackle your entire wishlist. One way to solve that is to take into account the After Renovation Value of your home and use that to increase the available equity - this is what RenoFi loans do. 

For example, imagine your home is currently valued at $500,000 and your outstanding mortgage balance is $400,000. You are planning a renovation and expect that the after renovation value of your home would be approximately $640,000. Your current loan-to-value ratio (LTV) is at 80%, which means that you effectively can’t borrow anything to fund your renovation. A RenoFi loan, however, would allow you to go as high as 150% LTV or 90% LTV using the after renovation value.

So in this example, while using a standard home equity loan results in your borrowing power being $0, a RenoFi loan allows you to borrow up to $176,000 thanks to the after renovation value of your home!

If you are considering a home renovation, RenoFi is by far the smartest way to finance your project. Learn more and explore your borrowing options here.

How to Keep Proper Records for Your Home Renovation Projects

Keeping good records of your home renovation project is super important for tax deductions. Here are some tips to stay organized:

• Save All Receipts and Invoices: Keep every receipt and invoice for materials, labor, and any other costs. This way, you have proof of what you spent.
• Document the Work: Take before-and-after photos of the work done. This helps show the extent of the renovations.
• Keep Contracts and Permits: Hold on to any contracts with contractors and any permits required for the work. These documents can back up your claims.
• Track Your Payments: Note down how and when you paid for each part of the project. This includes checks, credit card statements, or bank transfers.
• Organize by Project: If you’re doing multiple projects, keep records for each one separately. This makes it easier to find the right information when you need it.

How to Claim a Tax Deduction for Home Renovations

Here’s a simple guide to help you claim a tax deduction for your home renovations:

1. Figure Out What Qualifies: First, make sure your home renovations qualify for a tax deduction. Focus on upgrades that make your home last longer or function better.
2. Gather Your Records: Tax time is when all those receipts, invoices, and photos related to your home renovation come in handy. Make sure to gather all your project expense documents.
3. Fill Out the Right Forms: When you’re ready to file your taxes, make sure you fill out the correct forms. For instance, Form 1040 and Schedule A are typically used for itemizing deductions.
4. Itemize Deductions: You’ll need to itemize your deductions on your tax return to claim deductions for home renovations. This involves listing each deduction individually instead of taking the standard deduction.
5. Consider Professional Help: Besides reviewing the IRS guidelines for home renovation deductions, it’s usually a good idea to consult a tax professional when making your claims. They can help ensure you’re claiming the maximum deductions and following all the rules.

Other Ways to Fund Your Home Renovations

Here are some alternative ways to finance your home renovation projects besides traditional home loans.

Saving Up

Paying cash for your home renovation is the cheapest way to go since you won’t have to worry about interest charges or risking your home if you can’t pay back a loan. But this means you need to have a good chunk of savings set aside, which might not be doable for everyone.

Cash Out Refinance

A cash out refinance means getting a bigger mortgage to pay off your old one and using the extra cash for your home renovation. This option can be useful if you need a lot of money. Keep in mind, though, it means taking on more debt and might increase your monthly payments.

Credit Cards

Using credit cards for home renovations can be risky since the interest rates are usually higher than those on secured loans. But if you have a credit card with a 0% annual percentage rate (APR) offer, you can avoid interest charges until the introductory period ends. Just make sure you have a plan to pay off the debt before the interest kicks in.

Government Loans

Government programs like the 203(k) Rehabilitation Mortgage Insurance Program can help if you don’t have enough equity to borrow against. These programs are meant to assist homeowners in making necessary upgrades but often come with income limits and specific project requirements.

Personal Loan

You can use personal loans for home renovations, but keep in mind they’re usually unsecured and come with higher interest rates than secured loans. Carefully think this through, as it might not be the cheapest option.

Home Renovation Loan vs Home Equity Loan: What’s the Best Choice?

When deciding between a home renovation loan and a home equity loan, it’s important to understand their distinct purposes.

A home renovation loan is specifically designed for funding home improvements and renovations. It’s perfect for projects like adding a new room, remodeling a kitchen, or updating your home’s layout. This type of loan is tailored to cover these expenses and is a great choice if you’re looking to make substantial changes to your home.

For example, RenoFi’s renovation loans are ideal for financing your renovation projects with flexible terms that focus on enhancing your home’s value and functionality.

On the other hand, a home equity loan offers more flexibility in how you use the funds. You can use it for various purposes, not just home improvements. Whether you want to consolidate debt or fund another personal expense, a home equity loan can cover it. While it may offer lower interest rates and larger loan amounts, it’s not specifically geared towards renovations, so it lacks the targeted benefits of a renovation loan.

In a nutshell, if your main goal is to fund a renovation project, a home renovation loan is specifically designed for that purpose and provides the right kind of support. Conversely, if you need a loan with more flexible usage, a home equity loan might be the better choice.

Before you decide, consider your project needs and financial situation to know which option fits best with your plans.

Taking the Next Steps on Your Home Renovation Project

In closing, are home renovation loans tax deductible? It all comes down to the specific loan type and the upgrades you plan to make. Choosing the right financing option is important, whether your project is a major home renovation or a quick update.

Ready to find the right financing for your home renovation project? RenoFi specializes in tailored home renovation loans designed to fit your needs. RenoFi loans are the smartest way to finance a home renovation project. 

Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage and give up your low rate, RenoFi loans are based on the After Renovation Value of your home. This allows you to borrow on average 11x more, get a low monthly payment and keep your low rate on your first mortgage. 

Check out our financing solutions today and make your home improvement dreams a reality.