We’ve witnessed a remarkable rise in the cost of home ownership over the past decade. Along with exponentially rising home prices, mortgage rates have soared, compounding the affordability problem. And once you’ve bought a house, the expenses don’t stop — Real Estate Witch estimates that homeowners in the US spend an additional $17,459 each year on top of their mortgage payments.
You can get 30% of your solar installation costs back as a tax credit.
If you made energy-efficient improvements to your home in 2023, you can likely get back some of that money as tax credits, but it gets a little complicated. There are two types of tax credits for home energy improvements — the residential clean energy credit and the energy efficient home improvement credit.
The residential clean energy credit can give you 30% back on any money you spent installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems or fuel cell property. The only limit is for fuel cell property — $500 for each half a kilowatt of capacity.
The energy-efficient home improvement credit, also known as the nonbusiness energy property credit, is then split into two categories — “residential energy property costs” and “qualified energy efficiency improvements.”
In the first case of energy property costs, you’ll get a flat tax credit of $50 to $300 for installing Energy Star-certified items like heat pumps, water heaters or furnaces. In the second case of qualified improvements, you can get a 10% tax credit for the cost of improvements like adding insulation, fixing a roof or replacing windows.
The energy efficient home improvement credit previously had a $500 lifetime limit for all improvements, but starting with the 2023 tax year, the Inflation Reduction Act replaces that lifetime limit with a $1,200 annual limit.
To claim tax credits for energy-efficient home improvements made in 2023, you’ll need to document your costs on IRS Form 5695.
Any interest from a home equity loan or second mortgage can be deducted from your taxes just like regular mortgage interest, with the important limit of maximum loan totals of $1 million or $750,000 (for joint filers) if you purchased your home after Dec. 15, 2017.
It’s also very important to note that the 2017 tax law limits deductions for home equity loan interest to money that is used to “buy, build or substantially improve” homes. If you borrowed money to pay for a new car or vacation, you’re out of luck.
If you did pay interest on a home equity loan that was used directly on your residence, you can claim the deduction on the same line as mortgage interest and mortgage points: Line 8 on Form 1040 Schedule A.
Any income you earn from selling a home is taxable as a capital gain (with a notable exclusion — see below). Your gain is calculated by the difference between your sale price for the home and your “cost basis.” That cost basis includes what you paid for the home, the price of improvements that you may have made as well as any property loss from depreciation or casualty.
If you’ve put in a new roof, replaced a furnace, refinished floors or even landscaped the garden, be sure to include those costs to increase your adjusted basis and reduce the amount of your capital gains on the sale.
When you sell a home, you’ll need to pay taxes on the amount of money you earned on the sale as capital gains. However, if you live in the home for two of the previous five years before selling, you get a very large tax exclusion — $500,000 for married joint filers, or $250,000 for single or separate filers.
All Americans receive this tax exclusion regardless of their age and how many times they’ve benefited from it before. Note that the residence requirements apply whether you own the home or not. If you rent a house for two years and then buy it, you’re free to sell with the standard residence exclusion at any time.
You’ll likely receive the tax information about the sale of your home in a 1099-S form, and you’ll report your ultimate gain — with that $500,000/$250,000 exclusion — on IRS Form 8949. If you don’t receive a 1099-S form and your profit on the house is less than the exclusion, you don’t need to report the sale on your taxes at all.
Medical expenses can be a major tax deduction, but only if they go over 7.5% of your adjusted gross income, which is essentially your taxable income. Any home improvements — safety bars, accessibility ramps, wider doorways, railings and lifts, for example — related to medical conditions can be included in your tax deductions for medical expenses.
Keep all your receipts and invoices and include the total cost of the improvements or additions with all of your additional medical and dental expenses on Line 1 of 1040 Schedule A.
Despite all of the tax breaks available for homeowners, there are some home-related expenses that can’t be deducted from your income.
Everyone’s tax situation is unique. Before making major tax decisions, we recommend consulting a tax professional who can help you with both federal and state tax laws.
For more on income taxes, learn how to create an online IRS account.
