Which Home Improvements Reduce Your Taxes When You Sell?

Do improvements matter if your gain is under the $250,000 / $500,000 exclusion?

Not for the tax on that sale, but many New York owners are closer to the limit than they think. If you owned the home and lived in it as your main home for at least two of the five years before the sale, you can generally exclude up to $250,000 of gain, or $500,000 if you are married filing jointly, under IRS Publication 523 (opens an external site) (Section 121 of the tax code). Gain above the exclusion is taxable, so every documented improvement lowers the taxable part.

You are more likely to go over the exclusion if:

• You have owned the home for a long time. In much of New York City and Long Island, decades of appreciation can pass $250,000, or even $500,000.
• You file single. The same gain can be fully excluded for a married couple and partly taxable for a single or widowed owner. A surviving spouse who sells within two years of the spouse's death may still be able to use the $500,000 limit if the other conditions are met.
• Part of the home was rented out or used as an office, or you rented the whole home before selling. Depreciation from those years is taxed when you sell (depreciation recapture), separately from the exclusion, and if the rented or office space was a separate structure, part of the gain may not qualify at all.

We are a construction contractor. We do not prepare tax returns or give tax, legal or accounting advice. The tax information in this guide is general reference material; ask a CPA how it applies to your situation.

How is the taxable gain figured?

Gain is the sale price, less selling costs, minus your adjusted basis. Adjusted basis works like a running total:

Each dollar of basis you can document is a dollar less gain. The next two sections cover which spending counts.

Which home improvements count, and which are repairs?

Improvements that add to the home's value, prolong its useful life or adapt it to new uses add to basis. Repairs and maintenance that keep the home in good condition do not.

Repairs done as part of a larger project can count. IRS Publication 523 gives this example: replacing a broken windowpane is a repair, but replacing the same window as part of replacing every window in the home is an improvement.

Improvements that are no longer part of the home do not count, for example carpet installed years ago and since replaced.

Rental property draws the same line between repairs and improvements, but there a repair is deducted and an improvement is depreciated; see repairs vs improvements on a rental turnover.

Energy upgrades such as solar, heat pumps, insulation and windows are improvements too. But many of them came with a tax credit or a rebate, and that changes the math.

What if you got a tax credit or rebate for the upgrade?

An improvement adds what you actually paid for it to your basis. A credit or rebate is money you got back, so it comes off. If you included the cost of an energy improvement in your basis and received a tax credit or subsidy for it, you subtract that credit or subsidy from your basis. You already received a tax benefit for that money, so it cannot also count as your cost.

A tax credit reduces your tax dollar for dollar. It is different from a deduction, which reduces the income that is taxed. The credits and subsidies IRS Publication 523 lists include:

Credits from 2025 and earlier stay in the calculation until you sell. Keep the Form 5695 for each year you claimed one. For a 2025 Section 25C claim, also keep the qualified manufacturer identification number (QMID) that was required for specified property.

Utility rebates reduce basis too. A rebate for an energy-saving installation, such as a heat pump rebate offered through Con Edison or PSEG Long Island, lowers your basis: either you paid less in the first place, or you subtract the rebate you received.

Most work completed in 2026 or later has no federal credit to subtract. The homeowner credits for solar, batteries, heat pumps and other efficiency work have ended, so their full cost adds to basis, minus any rebate or utility subsidy. The exception is an EV charger placed in service by June 30, 2026, which may still earn the Section 30C credit; see the FAQ.

Does the solar tax credit reduce your home's cost basis?

Yes, by the amount of the credit, but solar panels still raise your basis. A system you own adds its cost to basis, minus the federal residential clean energy credit you claimed and any utility subsidy. A $30,000 system that earned the 30% credit, $9,000, adds $21,000.

• Systems completed in 2026 or later do not qualify for the federal credit, even if you paid for them in 2025, so their full cost adds to basis.
• New York State solar equipment credit (Form IT-255): still available, at 25% of qualified costs up to $5,000, for a system at your principal residence. Publication 523's list covers federal credits and utility subsidies and does not mention the state credit, so ask your CPA how it is treated.
• Incentives paid to your installer: if an incentive, such as a NY-Sun incentive, went to your installer and lowered your price, your cost, and so the amount you add to basis, is already lower.
• Sales tax and the NYC abatement: residential solar equipment is exempt from New York State sales tax, and from local sales tax in New York City and on Long Island, which simply means you paid less. The NYC solar and storage property tax abatement lowers your property tax bills; it is not on Publication 523's list of credits and subsidies that reduce basis.
• Leased panels or a power purchase agreement (PPA): the solar company owns the system, so there is no cost of yours to add to basis.

The New York State and New York City solar and storage benefits that remain in 2026 are summarized in our guide to New York solar, heat pump and EV charger tax credits.

Renting out your home after installing solar

If you move out and rent your home after installing solar, you may still qualify for the $250,000 / $500,000 home sale exclusion, but the rental years add a depreciation question. The house and the solar system may be depreciated on different schedules, and the depreciation for the rental years is taxed when you sell, even when the exclusion covers the rest of the gain.

Renting after you move out does not by itself cost you the exclusion. Publication 523 does not count the time after you last lived in the home as nonqualified use, as long as you still meet the two-out-of-five-year ownership and use tests on the day you sell, which leaves most owners about three years. What the exclusion never covers is depreciation allowed or allowable after May 6, 1997, including depreciation you were entitled to but did not claim.

The house itself is depreciated over 27.5 years. A solar system may follow a different schedule: a 2025 law change removed one of the 5-year depreciation classes for solar property whose construction began after 2024, so the schedule can depend on when the system was installed and how it qualifies. That mismatch raises questions to settle with your CPA:

• What depreciable basis the house and the solar system each start with when the home becomes a rental, after past improvements and any energy credit
• Which schedule the solar system follows, and how the two schedules play out year by year
• How much of the gain at sale the exclusion still covers, and how much is taxed as depreciation
• Whether a battery, heat pump or EV charger installed at the same time follows the building or the equipment

These answers depend on your own dates and numbers. Work through them before your first rental return, when the starting basis is set.

A worked example

A married couple filing jointly buys a house in Queens in 2010 and sells it in 2035. The amounts are illustrative, and to keep it simple the example leaves out the New York State solar credit.

They sell for $1,250,000 after selling costs, so their gain is $566,000.

As a married couple: $566,000 minus the $500,000 exclusion leaves $66,000 of taxable gain.

If one person filing single owned the same house: $566,000 minus $250,000 leaves $316,000 of taxable gain.

With no records of the improvements: basis would be $610,000 and gain $640,000, leaving the couple $140,000 of taxable gain, $74,000 more.

Did taking the solar credit hurt? Had the installation been completed in January 2026, there would have been no credit, basis would have been $693,000 and taxable gain $57,000. The credit added $9,000 of gain in 2035, in exchange for $9,000 off their tax for 2025 (or a later year, if part of it carried forward).

How long to keep records: the 2035 return is due in 2036, so the records, starting with the 2010 closing statement, should be kept until 2039.

What records should you keep, and for how long?

Keep the records that document your adjusted basis until three years after the due date of the return for the year you sell the home.

• The closing statement from your purchase
• Contracts and itemized invoices for each project, with capital improvements separated from repairs
• Proof of payment
• Permits and sign-offs: DOB job numbers in New York City, town permits on Long Island
• Equipment specification sheets, and the QMID for any 2025 Section 25C claim
• Form 5695 for every year you claimed a residential energy credit
• Records of utility rebates, NYSERDA incentives and other grants you received

Co-op and condo owners: keep every assessment letter for building-wide capital projects, with proof of payment. A co-op shareholder owns shares in the corporation rather than the real estate itself, and how an assessment affects your basis depends on what it paid for, so ask your CPA before you sell.

What to ask your contractor to put on the invoice

• The work itemized by room and building system, not one lump sum
• Repairs on separate lines from new or replacement installations
• The make, model and specification sheet of equipment such as heat pumps, water heaters, solar panels, batteries and chargers
• Permit numbers and final sign-off dates
• The date the installation was completed, which decided Section 25D eligibility and can matter for state programs

Our estimates and invoices are itemized this way. If the work is for a rental or a business rather than your own home, the contractor may also need a Form 1099-NEC from you; see Form 1099-NEC and W-9 rules for 2026.