Bailout Cash for Your Home

The government is encouraging you to upgrade your home. Undertake the right renovations, and the govern-ment will pay at least part of the cost through tax breaks. Some of the incentives are significant.

The incentives are for energy efficient or renewable energy improvements and changes. Some of the incentives are new, and some are expansions of previous benefits. You do have to pay for the improvements, and the tax benefits won’t offset the full cost or even come close in most cases. The incentives are tax credits, and to qualify for the credits you have to use products with the highest energy efficiency levels, which also tend to be the most expensive. But the credits do reduce the cost to you. The improvement could make the house more marketable and might reduce your monthly energy bills or other expenses. You don’t want to make the improvements just to get the tax benefits. But if you are need or want improvements anyway, consider trying to qualify for the tax breaks.

When calculating the benefit, keep in mind the incentives are tax credits. They are subtracted directly from your tax bill. One dollar of a credit reduces your tax bill by one dollar. A credit is more valuable than a deduction of the same amount. Many of the current credits are available only for 2009 and 2010, so act soon if you want to take advantage of them.

The qualified improvements fall into two general categories.

Energy efficiency improvements. The items that qualify for this credit are those your home already has. Replacing them could qualify for the credit. Examples are windows, siding, insulation, and Energy Star heating and water systems. Also included are stoves that use renewable biomass fuel (wood, pellets, plants) and certain roofing materials. Other appliances are not eligible.

This credit is 30% of qualifying costs with a maximum credit of $1,500. The $1,500 limit applies to all qualified improvements for both 2009 and 2010. You do not receive a $1,500 credit each year or for each qualifying improvement. Installation is included in the costs that qualify for the credits. Only improvements count. New home construction does not qualify, but the renewable energy credit (discussed next) and an energy-savings incentive are available for new home construction.

Renewable energy. Systems that generate renewable energy are the second category of qualifying improve-ments. Eligible improvements include those using solar, wind, geothermal, and fuel cell technology. The credit is 30% of the cost, and there is no limit on the qualified costs, except for fuel cells. The credit can apply to heating systems, water heaters, and overall electric systems. This credit also applies to all residential energy-efficient property that is placed in service by Dec. 31, 2016.

A trick with both credits is the products must meet minimum energy efficiency standards, and the IRS has not issued final rules. The IRS, however, has issued interim rules on the renewable energy credit. The rules state a manufacturer may issue a written certificate to the consumer that the property qualifies for the tax credit, and the taxpayer may rely on that certificate to take the credit. The certificate does not have to be attached to the tax return for the year, but it should be retained. The certificate must contain the name and address of the manufacturer, the type of property, and the model, make, and other identifying information of the property. Other optional information also may be included.
These credits apply only to equipment put in a dwelling unit, not other types of property.

For the energy efficiency improvement credit, until the IRS issues guidance to manufacturers for certifying their products homeowners can rely on certifications that follow the rules issued under the credit that expired in 2007. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009, qualifies.

When considering improvements to your residence, review the energy efficient property available and the tax credits for which they qualify. Also, check for incentives offered by your state. Many states offer the same or similar credits or deductions for the property.

RW June 2009.