At this time of year, many people are wondering whether a new roof or other home project they did in 2016 will possibly help them earn a tax credit in April. The answer is…maybe.
The first step in getting that tax credit is to always keep your receipt for any home improvement, like new roofing, siding, windows and doors, so that you can prove the purchase.
We also always advise our customers to consult their tax professional if they have questions about the tax benefits of their home improvements. However, while there are many ways your project can qualify for a tax benefit depending on your individual situation, the two most common are as a capital improvement or a residential energy efficient property credit.
New Roofing as a Capital Improvement
In the eyes of the IRS, a room addition is not the same as replacing your kitchen cabinets, even though we may think of them both as a “home improvement”. The IRS differentiates between a “capital improvement” and a “repair” in page 12 of Publication 523, Selling Your Home, where they explain that a home repair returns something to its original condition whereas a capital improvement “adds to the value of the home by prolonging its useful life or adapting it to new uses”.
So fixing a broken window, which keeps the home in good repair, does not prolong its usefulness, while putting in new windows can be considered a capital improvement. New roofing, is also considered a capital improvement.
It is important to keep track of the capital improvements you make because this information can save you money when it comes time to sell your house. That’s because the cost of your capital improvements is added to your home’s “cost basis” which is used to calculate any capital gains tax you may incur upon the sale.
For example, let’s say you bought your home for $300,000 (which includes all closing costs and professional fees) and you spent $25,000 on a new roof and some other qualified, capital improvements. You live in the house for a while and then sell your home for $600,000. You have made $250,000 in taxable capital gains profit, which is the difference between the sale price and your cost basis (the original value of your home plus your $25,000 in improvements). If the current exemption for capital gains taxes is $250,000 for your tax bracket, your adjusted cost basis has just saved you $25,000 in taxable income. Good thing you kept those receipts!
Can I Get a Tax Credit for Energy Efficient Home Improvements?
The government likes to reward homeowners who make their home more energy efficient with an appropriate tax credit. According to Energy Star, Americans spend $40 million in air conditioning every year although using more efficiently designed products can save their energy consumption significantly. For example, roofing products that reflect the sun’s rays better can reduce peak cooling by demand by 10-15 percent.
Tax form 5695 can be used to apply for a residential energy credit for the installation of qualified solar electric, water heating and small wind energy costs as well as qualified geothermal heat pump and qualified fuel cell costs. Certain other energy efficient improvements that include “any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home when installed” also qualify.
These would include new exterior replacement windows and doors and certain roofs. Metal roofs that have pigmented coatings qualify, as do asphalt roofing materials with approved Energy Star ratings that have appropriate cooling granules specifically designed to reduce the heat gain of your home. We offer GAF brands in particular that offer exceptional energy savings.
The qualifying credit can be up to 10 percent of the cost of the improvement or the residential energy property costs incurred in 2016. There is a limit on the credit of $500 for tax years after 2005 and a combined credit of $200 for windows for all tax years after 2000.
As with most tax credits, there are many variables to determining the credit depending on your filing status, number of residences, type of improvement, etc. Check with your accountant to determine exact numbers.
Spring is not only the time to pay taxes, but it’s the perfect time to plan your energy efficient home improvement to include on next year’s return. If you are ready to schedule your next exterior home improvement project, contact us for a free estimate.