Home Improvement and Residential Energy Tax Credits in 2019
A Tax Credit Is Still Available for Energy-Efficient Home Improvements
Homeowners can claim a federal tax credit for making certain improvements to their homes or installing appliances that are designed to boost its energy efficiency. Solar, wind, geothermal, and fuel cell technology are all eligible. Energy Star products boast 30% less energy usage, and heat pumps that meet Energy Star guidelines qualify for the tax credit.
There used to be two tax credits available for these improvements and appliances, but no more. One of them expired at the end of 2017, although the other was rescued by the Bipartisan Budget Act of 2018, at least for improvements made through 2021.
The Residential Renewable Energy Tax Credit
This tax credit is 30% of the cost of alternative energy equipment that's installed on or in a home, and it includes the cost of installation. Solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property are examples of equipment eligible for the tax credit.
There's no dollar limit on the credit for most types of property, although the credit for fuel cells is capped at $500 per half-kilowatt of power capacity. Installing a fuel cell with a 4-kW capacity would earn you a $4,000 tax credit.
The Residential Renewable Energy tax credit isn't refundable, but the unused portion can be credited to the following year’s tax return if the credit is more than any tax you owe.
The home must be located in the United States, but it doesn't have to be the taxpayer’s main residence unless the alternative energy equipment is qualified fuel cell property. In this case, the equipment must be installed in your principal residence. Both existing homes and homes under construction are eligible.
The credit for solar electric property and solar water heating property is extended for improvements made through December 31, 2021.
The Non-Business Energy Property Credit
This tax credit has unfortunately expired, but you can still claim it for tax years prior to 2018 if you haven't filed yet or if you go back and amend a previous year's tax return.
The first part of this credit was worth 10% of the cost of qualified energy-saving equipment or items added to a taxpayer’s main home in the past year. For example, energy-efficient exterior windows and doors, certain roofs, and added insulation all qualify, but costs associated with installation weren't included.
The second part of the credit isn't a percentage of the cost, but it does include the installation costs of some high-efficiency heating and air-conditioning systems, water heaters, and biomass fuel stoves. Different types of property have different dollar limits.
The main home must have been located in the United States to qualify for the credit, and it was only available for existing homes, not homes that were under construction.
This wasn't a particularly generous tax credit. The credit for home insulation, exterior doors, certain roofing materials, and exterior windows and skylights was just 10% of cost. You could deduct 100% of energy-related property costs, but this portion of the credit had a maximum lifetime limit of $500—you couldn't claim $500 per year.
And you'll need written certification from the manufacturer that a product qualified for the tax credit, which is typically found on the manufacturer's website or in the product’s packaging. Taxpayers should not attach this to their tax returns, but keep it on hand with your other tax records.
Energy Tax Credits Reduce Your Cost Basis
You must reduce the cost basis of your home by the dollar amount you claim for the residential energy tax credits. The IRS explains in Publication 523: "Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures."
What does this mean? Let's say you bought your home for $250,000 and sold it for $300,000. Your cost basis is $250,000, assuming you didn't make any other improvements that did not result in claiming a residential energy tax credit. You would have capital gains of $50,000—the difference between $300,000 and $250,000—and capital gains are taxable.
Now let's say that you claimed that $4,000 tax credit. Because you must subtract this from your cost basis, your gain increases to $54,000, or $300,000 less $246,000.
Energy Credits Tax Forms and Instructions
Complete and file IRS Form 5695 with your tax return to claim either the Residential Renewable Energy tax credit in current and future years or the Non-Business Energy Property tax credit for prior years.
You might notice that the area for the Non-Business Energy Property tax credit on the 2018 form is notated, "Reserved for Future Use." This is simply a placeholder in case Congress renews the credit in future years. Meanwhile, you'll need the 2017 version of Form 5695 if you want to amend a previous year's return to claim this credit.