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Tax breaks for energy-efficient home upgrades harder, but not impossible, to come by

4 min read

4 min read

September 29, 2015

H&R Block

There is good news and bad news for homeowners making energy-efficient improvements. The bad news is that what had been the most common tax break for these upgrades – the nonbusiness energy property credit – expired last year. However, it had already been in decline, falling from $5.4 billion in 2010 to $449 million in 2012.

The good news is that the residential energy credit is still available to homeowners and it has slowly grown since 2006. In 2006, homeowners received almost $43 million from this credit, but that amount grew to $817 million by 2012. In both 2011 and 2012, taxpayers received a larger tax credit from the residential energy credit than the now-expired nonbusiness energy property credit.

Homeowners may still claim tax advantages for certain home improvements, but need to plan their alternative energy-related upgrades carefully if they wish to lower their tax liability. Homeowners should remember these three things:

  1. The cost of home improvements can increase basis and thus decrease a homeowner’s tax liability when selling the home.
  2. The cost of alternative energy equipment may qualify for a tax credit.
  3. Keeping up with changes to tax rules, possibly close to or even during the tax filing season, will help homeowners secure the best tax outcome.

Increase investment with home improvements

For qualifying homeowners, the tax code excludes from tax the first $250,000 of gain from a home sale, or $500,000 for married taxpayers filing jointly. Many homeowners will not see that kind of gain on their home sale, especially after they take into account improvements they’ve made over the years. Upgrades like installing new heating and cooling, weatherizing a house or upgrading a roof or windows generally add to their basis in the house.

Tracking upgrades is especially helpful if the homeowners do not qualify for the exclusion or their gain on the sale is over the exclusion amount. For example, if a single homeowner bought a fixer-upper for $100,000 at the bottom of the housing market and, after putting considerable work into the property and watching property values increase in his neighborhood over many years, sold the house for $400,000, he would potentially have to pay taxes on $50,000 in gain. But if he spent $150,000 to improve his home, including energy-efficient upgrades to windows and the heating and cooling system, his gain is now below the exclusion threshold for single filers.

Maintenance costs, such as painting the home, do not count as upgrades increasing a homeowner’s basis. To qualify, an upgrade will have a lifetime of more than one year, add value or usefulness to the home, prolong its life or adapt it to new uses.

Try alternative energy

Because the most common energy credit expired, homeowners making these improvements will need to look elsewhere to find the right credit. Some may be able to take advantage of the residential energy credit, an alternative-energy credit. Homeowners who install alternative-energy equipment, such as qualifying solar panels or wind turbines, can receive a credit of up to 30 percent of qualified expenses. There is no limit on the dollar amount homeowners can claim. If the credit exceeds the size of their tax liability, they can even carry forward the unused credit to the next year’s return. However, this credit is due to expire after 2016.

Anticipate last-minute changes

Finally, homeowners should keep records of all their home improvements in case Congress renews the nonbusiness energy property credit, extends the residential energy credit beyond 2016 or makes changes to the exclusion. The nonbusiness energy property credit first expired at the end of 2007, was unavailable for 2008, was renewed again in 2009 and has since been extended in various forms until it expired again at the end of 2014. Taxpayers must keep good records of expenses if they wish to avoid losing out on beneficial tax changes.

Even though one popular and advantageous energy tax credit expired, homeowners can still enjoy tax benefits for making energy-efficient or alternative energy upgrades to their homes. The key is to keep good records and stay informed of possible tax extensions and other tax changes. When in doubt, homeowners should consult a tax professional to make sure they get the best tax outcome possible for their energy improvements.

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