Most homeowner that files an annual tax return contrives to get a refund from the IRS, as large a refund as possible. You almost want to dream up deductions, but that’s tax fraud, darn it. However, there are ways you can take deductions by investing in home improvements.
A whole host of federal, state, and local tax credits are yours for the claiming, and in this blog we will talk mainly about two:
- The Non-Business Energy Property Credit
- The Residential Energy Efficiency Property Credit
Non-Business Energy Property Credit
This credit allows you to take off 10% on specified energy-efficiency products that you have installed on your primary residence’s property. The credit stipulates your primary residence must be in the United States in order to be eligible for the credit.
There are exceptions to this rule, in that some eligible energy-efficient products installed on your property you can claim the total cost of. The amount of the credit is flexible according to the type of property you purchase and install. The tax credit contains what is called a maximum lifetime credit capped at $500.00. Again, there are stipulations as to how this tax credit may be used, for example of the $500.00 limit only $200.00 of it is allowable for storm windows. But that’s how it is with the government that cherry-picks the way it is going to distribute the credit through certain federal agencies.
Eligible energy-efficient enhancements under the Non-Business Energy Property Credit include (sans labor or installation expenses):
- Insulation that protects against winter heat loss, or summer heat increase.
- Outside windows, doors, as well as skylights.
- Storm windows and doors (installation can only be done on specified kinds of windows and doors).
- Roofing materials (metal and specified asphalt types) that protect against winter heat loss, or summer heat increase.
- Other energy-efficiency property outlays along with contractors’ labor costs, including preparing, assembling, and installing such items as:
- Electric heat pumps
- Propane-, natural gas- and hot-water heaters
- Propane, natural gas, and oil furnaces
- The current technology for central air-circulating fans used in propane-, natural gas-
and hot-water heaters and propane, natural gas and oil furnaces.
- Biomass fuel stoves
Again the limits on the maximum lifetime credit of $500 are categorized according to the type of energy-efficient product purchased and installed.
Residential Energy-Efficient Property Credit
This tax credit permits homeowners to take off 30% when they purchase green-energy products that are installed in the interior and exterior of their houses. Environmental-friendly equipment must fulfill energy-efficiency specs that are spelled out on the residential property credit form. Following is a list of qualifying equipment.
- Small-wind energy
- Geothermal heat pump
- Fuel cell
- Solar electric and water heating
No cost limits are placed on many kinds of property under the Residential Energy-Efficiency Property Credit. Only fuel cell property has a cap of $500 according to maximum kilowatts of one-half of the property.
Not just tax credits but rebates under the Residential Energy-Efficiency Property Tax are allowed. Rebates will cover the expense of the project but not beyond. Here is an itemization of eligible equipment:
- Natural gas boilers (hot and steam). They must rate at 88%- and 82.5%-plus AFUE* ratings
- Natural gas furnaces 95% AFUE+ (water, tankless water, indirect water heater 88% AFUE+)
- Smart thermostats (programmable units and auto-scheduling units)
- Air Sealing
Only weatherization professionals can do the installation.
- Wall Insulation
Rebates can only be given for wall insulation that includes air sealing also. An approved weatherization professional must install these.
- Attic Insulation
Must be combined with air sealing and installed by an approved weatherization professional.
- Furnace Duct Sealing
Must be installed by an approved weatherization professional.
The rebates on such property equipment range from $20 to $600.00. In some cases rebates are calculated according to square footage.
The Residential Energy-Efficient Property Credit does not necessarily mean every property type is capped. Happily, if your credit runs over the taxes you owe, you can roll over the difference and apply it to the following years’ income tax return.
You may say to yourself, these tax credits are all well and good, but is there anything else out there that can help me with the cost of buying and installing HVAC equipment, including alternative-energy products? Yes there are. You can get manufacturer rebates and manufacturer financing; federal grants; state-sponsored programs; an equity home improvement line of credit; bank loans; and financing from HVAC companies themselves. Pretty good, I’d say, and worth the time and effort to help you–at the very least–partially offset your investment costs in energy-efficient equipment.
Yet there is one more way by which you can cut your expenses involved in home improvement projects. Selling your house. It’s delayed gratification I know, but it’s another opportunity when the time comes to pay yourself back for all those home improvements.
First, let’s separate the wheat from the chaff. Home improvements are all those items that are added to your home’s tax basis. Such things as a new AC unit, water heater, furnace, and roof, for starters. But repair costs are not part of the tax basis equation, so let’s dispense with that.
Capital Improvements, Tax Basis, and Capital Gains
Home improvements, known as capital improvements, are added, like I referenced earlier, to your home’s tax basis, the selling price of your home. The present law stipulates that the initial $250,000 profit on the sale of your primary residence ($500,000 for marrieds) is tax-free. This may sound like manna from heaven, but according to tax experts, who understand the tax code, this generous exception may not suffice to protect the profit from your home’s sale. Therefore, it is essential to maintain meticulous records of all the home improvements you’ve invested in over time.
If you want to find out the amount of profit you will receive when you put your house up for sale, add up all the expenses incurred, along with what you paid for your house. Then tack on the dollar amount of every home improvement you’ve made since you’ve lived in your home and reach a sum total. The sum total will be your adjusted basis. Now look at the difference between your adjusted basis and the sales price the home was bought for. If you end up making a profit and it is over $250,000 ($500,000 for marrieds) that capital gain could be taxable.
Knowing this information in advance will help you to decide how much money you want to sink into capital improvements, in order to avoid exceeding the capital gains limit when you sell your home.
There is more to this game than we’ve discussed here. Many variables play into the capital gains scenario: increased housing prices, a home business, and rental income are among some of them. Consulting with your tax accountant is the action to take ahead of the time you decide to sell your home. They will be able to advise you on all the finer points of home improvements, tax basis, and capital gains.
We strongly recommend you to visit your taxes professional for more information on this options and others that might be available for you.
*Annual Fuel Utilization Efficiency