Maximizing Returns and Tax Benefits on Home Improvements 

When you’re considering home improvement projects, understand that not all upgrades hold the same value. The money you spend on some improvements might not give you a good return or help increase your sales price. However, other improvements may return more than you spent.  

Additionally, there are some upgrades or alterations that provide better tax benefits than others. You may want to consider these for your next tax return. 

Are you planning a renovation to get more enjoyment from your home or are you preparing to sell? Knowing which projects give the best return on investment (ROI) and tax benefits can help you make better financial choices. 

How do you calculate ROI? 

Return on investment is the expected percentage of profit from home improvements when you sell your property. For instance, let’s say you put $100,000 worth of upgrades or repairs into your house. If your house value increases by $75,000, then your home improvement return on investment would be 75%. 

Highest ROI for home improvements 

According to recent studies, exterior upgrades consistently top the list for best return on investment for home improvements. These projects not only enhance curb appeal but also recoup a significant portion of their cost at resale: 

Improvement	Return on investment1
Garage door replacement	Up to 194%
Entry door replacement (steel)	Up to 188%
Manufactured stone veneer	Up to 153%
Minor kitchen remodel (midrange)	Up to 96%
Siding replacement (fiber-cement or vinyl)	80–92%

 Other worthwhile projects include window replacements, composite or wood deck additions, and screened-in porches. These can return 70–90% of their cost. 

Tax benefits for home improvements 

A common question: Are home renovations tax deductible? The answer: While most home improvements aren’t directly tax-deductible, there are strategic ways to gain tax advantages. 

It’s important to note that comfort may also be a factor in deciding your home renovations. Depending on how long you have lived in your home, you may gain benefits beyond just money. 

Energy-efficient improvements 

The One Big Beautiful Bill ended tax credits for energy-efficient upgrades. However, you might still be able to claim them for tax year 2025. 

The Energy Efficient Home Improvement Credit (Internal Revenue Code Section 25C) ends Dec. 31, 2025. The Residential Clean Energy Property Credit (IRC 25D) will also end Dec. 31, 2025.  

If you plan to upgrade your home with any of the following, you must install by Dec. 31 to get the tax credit: 

• Solar panels 

• Energy-efficient windows and doors 

• Heat pumps and HVAC systems 

• Insulation upgrades 

The Energy Efficient Home Improvement Credit lets you claim up to 30% of the cost, with yearly limits. The Residential Clean Energy Credit also offers up to a 30% credit for solar and other renewable systems. 

Medical necessity alterations 

If you make home improvements for medical reasons, you may deduct some costs. This includes things like wheelchair ramps, wider doorways, or accessible bathrooms. If these costs are more than 7.5% of your adjusted gross income (AGI), you can deduct them. They must qualify as medically necessary expenses (IRC 213) and don’t increase your home’s value. 

Home office improvements 

If you are self-employed and use part of your home for business, you may be able to deduct some improvements. This includes repairs, upgrades, and even depreciation over time. See our Guide to Home Office Tax Deductions. 

Capital improvements and home sale exclusions 

Capital improvements — those that add value, prolong the home’s life, or adapt it to new uses — can increase your home’s cost basis. Cost basis is the original value of an asset for tax reasons. It usually includes the purchase price and any fees or commissions. 

This means you can’t directly deduct the expenses, but you can reduce your taxable capital gains when you sell. 

Examples include: 

• New roof 

• Room additions 

• HVAC systems 

• Plumbing or electrical upgrades 

When you sell your main home, there may potentially be capital gains tax. You can exclude up to $250,000 of capital gains. If you are married and file jointly, this amount is $500,000. Keeping track of your home renovations can help you stay below this limit. Also, remember to update your homeowners insurance coverage after major renovations. 

Planning tips for homeowners 

To make the most of your investment and tax benefits, consider the following: 

• Keep detailed records: Save receipts, contracts, and before-and-after photos. These will be essential for tax reporting and resale. 

• Consult a tax professional: Tax laws change frequently. A professional can help you understand which improvements qualify for credits or deductions. 

• Think long-term: Choose improvements that align with your lifestyle and future plans. For example, energy-efficient upgrades can offer tax perks as well as reduce utility bills over time. 

• Bundle projects strategically: If you’re planning multiple upgrades, consider timing them to maximize annual tax credit limits. 

Next steps 

Home improvements can help you build equity, increase comfort, and lower your taxes — if you make smart choices. Focus on projects that have a strong return on investment. Look into tax incentives that are available.  

In addition to the benefits you may gain from home renovations, consider whether they align with your financial goals. Your equity, age, health, and more can factor into whether it’s practical to make improvements or modifications. This is when a financial plan can be very useful. 

If you’d like more information on selling a house or making home improvements, capital gains taxes and home improvement tax credits, Mercer Advisors can help!  

We integrate financial planning, investment management, tax planning and preparation, estate planning, and insurance solutions into a comprehensive wealth management solution. Ready for Mercer Advisors to help amplify and simplify your financial life? Let’s talk. 

¹ “2024 Cost vs Value Report“Journal of Light Construction, April 23, 2024.

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