A well-planned bathroom remodel requires more than an understanding of the renovation costs. You also have to learn about the corresponding tax deductions. Is a bathroom remodel tax deductible? In most cases, it’s not unless the remodel qualifies as a medical necessity or improves a home office. Let’s talk about how you can save on taxes through bathroom improvements.
Is a Bathroom Renovation a Tax Deduction?
Generally, a bathroom remodeling project is not tax deductible. The Internal Revenue Service (IRS) considers any home improvement project a personal expense. The agency allows no deductions for such expenses, including bathroom renovations. As such, you are usually ineligible for one with your remade bathroom.
Yet, that does not mean you’re not getting anything from your investment. Bathroom improvements may still be eligible for tax deductions and credits. These include the following:
Medical Expense Credits
Bathroom improvements intended for medical purposes may qualify for tax deductions. Eligible upgrades address the specific medical needs of any resident, including special health conditions and disabilities. Examples include accessibility features such as bathroom guardrails, roll-in showers, and widened entrances. Such improvements can accommodate wheelchairs and other bulky medical devices and add a layer of safety for people with certain physiological requirements.
The renovation costs incurred by medical improvements may qualify for itemized deductions on Schedule A of Form 1040. You can claim them as part of your Medical and Dental Expenses. The IRS will then consider the amount deductible if it exceeds 7.5% of your adjusted gross income (AGI).
Residential Energy Credits
Energy-efficient bathroom upgrades qualify you for the Energy Efficient Home Improvement Credit. This applies to your main home or the property where you live most of the time. Eligible bathroom improvements include low-flow showerheads and toilets, skylights, and tankless water heaters. The idea is to incentivize effective energy management through energy-efficient upgrades.
Qualified bathroom upgrades will get residents a tax credit of up to $3,200. This covers 30% of eligible expenses. You may claim this credit annually on Form 5695 for qualified improvements made after January 1, 2023, and before January 1, 2033. Note that this is a nonrefundable tax credit. This means that you will not get more on the credit than the amount you owe in taxes. Additionally, any excess cannot be applied to future tax years.
Furthermore, from 2025 onward, the IRS requires that all items used should come from qualified manufacturers. Otherwise, the improvement will not be eligible for the tax credit. The taxpayer must also report the items’ product identification numbers (PIN) on their tax return.
Deductions For Rental Property Bathroom Remodeling
While improvements to rental property, including bathroom remodeling, are not deductible according to the IRS, there are a few ways to recover the incurred expenses. Let’s take a look at the two best-known methods:
- Deductions through depreciation. Rental bathroom improvements cannot be immediately tax deductible. It would significantly reduce the tax you’ll have to pay in a year and may not get you the true value of your upgrade. IRS would rather spread the deductible costs over the years. While the IRS sees the long-term benefits of the remodel, they would also like to account for the fact that its value depreciates over time. You may use Form 4562 to report the depreciation beginning in the year you started renting out your property and the specific year when you renovated your bathroom.
- Deductions as business expense. Another possible way to get a deduction for your rental’s bathroom remodeling is by reporting it as a business expense. You can do so on Schedule E of Form 1040, which allows for deductions on piecemeal costs incurred by the renovation, including repairs, cleaning, and supply purchases. This applies to work to upgrade or maintain the property at the owner’s expense.
Are Bathroom Renovations Capital Improvements?
The IRS considers bathroom remodeling as capital improvement for residential and rental homes. However, it should be noted that the tax treatment for these types of property has major differences, as we can infer in the previous section. In either case, the renovation counts as capital improvement for the following reasons:
- It adds value to the property. Overhauled bathrooms have improved aesthetic appeal, optimized layout, and modern features, enhancing comfort and functionality.
- It prolongs the useful life of the property. Bathroom remodeling may involve the repair or replacement of worn plumbing, damaged fixtures, and outdated electrical systems. The work, in turn, extends the bathroom’s usefulness by years or decades. At the same time, it prevents technical issues from occurring in the future.
- It prepares the property for a different use. In special cases, homes may be converted into shops or offices. Bathroom remodeling modernizes the place, making it easier for it to adapt to the new features necessary for the property’s conversion.
Are fixing up expenses deductible?
Fixing up expenses—costs related to repairs done to a house in preparation for its sale—incurred on residential property bathrooms are generally not tax deductible. Unlike capital improvements, fixing up involves minor repairs and cosmetic work rather than upgrades and long-term fixes meant to improve the property and prolong its usefulness. The goal is to make the home more attractive to potential buyers, leading to a quicker sale. However, as most of the work done serves the purpose of presentation rather than improvement, it usually will not add to the property’s sale value.
On the other hand, fixing up expenses for rental property bathrooms may be deductible, depending on the nature and scope of the work. The IRS considers ordinary repairs that keep the bathroom in good working condition, such as replacing broken toilet seats and leaky faucets, as business expenses and are, thus, deductible in the year on which they are incurred. The same goes for capital improvements, which include reinforcement of the bathroom structure, major cosmetic restoration, and adaptation to a new anticipated use.
Do bathroom renovations pay off?
Bathroom improvements do pay off. Upgrades and repairs not only make the place more comfortable and functional for residents or more attractive to potential buyers; there are tax incentives in place that could help you recover your expenses, allowing you to reallocate more resources where they are needed the most.
