Owning a home is one of the most substantial expenses in most people’s lives. Real estate is not only expensive to purchase but also to maintain. Ordinary home maintenance costs, such as landscaping, repairing leaky faucets, repainting, and replacing carpeting or flooring add up over time, and more extensive renovations or repairs can be even more costly. When you consider monthly mortgage payments, utilities, property taxes, and other costs, it’s not surprising that home ownership often comprises the bulk of a family’s monthly budget.
Homeowners do have several advantages over those who rent their homes, however. In addition to building equity over time as you pay down your mortgage and, with favorable market fluctuations, an increase in the value of your property, home ownership can be a wise long-term investment. Additionally, homeowners can take advantage of a variety of rebates, tax credits, and home savings opportunities not available to renters.
Taking advantage of the tax benefits and other perks of home ownership can help to offset the costs of maintaining your home or even provide you with the extra cash you need to take on a renovation that you’ve been considering to improve your property. Even people who rent their homes can reduce their monthly expenses by making a few simple changes that cut down on energy consumption and the resulting utility costs.
What You’ll Find in This Guide
In this guide, you’ll find information on the many tax credits, rebates, and other savings opportunities that can help homebuyers and homeowners cut energy costs and reduce the cost of home ownership. From special lending programs to tax advantages for purchasing qualified, energy-efficient products, tax deductions for mortgage costs, and more, there are myriad ways for homeowners to reduce their tax burden and make energy-efficient upgrades that will pay for themselves over time in energy savings.
Of course, the available tax credits and deductions are subject to change from year to year, so be sure to verify any credits or deductions you plan on taking with the IRS or your tax preparation professional before you file your taxes.
Table of Contents:
- Mortgage-Related Deductions for Homeowners
- Tax Credits for Energy Efficiency
- Where Can You Benefit Most? Find Out with a Home Energy Audit
- Affordability: How to Pay for Energy-Efficient Home Improvements
- Other Ways to Cut Down on Your Home Energy Costs
- Rebates for Homeowners
- More Resources on Savings Opportunities for Homeowners
Tax credits are a big advantage for some homeowners. In a 2015 report for Market Watch, Daniel Goldstein points out that the government offers “a bucketful of tax breaks” each year in effort to encourage Americans to purchase homes. A boost in home sales gives the economy a boost, and generally, a healthy real estate market is a sign of a strong economy.
So, what tax credits can homeowners take advantage of? If you have a mortgage on your property, you can deduct the interest you pay on the loan each year on your income taxes. This deduction helps many homeowners reduce their taxable income, and in some cases, can put you in a lower tax bracket, offering even more savings.
The mortgage interest deduction applies not only to a mortgage on your primary home, but also to a second home for those who own more than one property. In most cases, homeowners can use this deduction up to $1.1 million in debt, including home equity loans. If you take out certain loans in order to make home improvements, you can also deduct the interest on these loans. Home equity lines of credit (HELOC), for example, as well as certain types of 203k mortgages, can be used to make improvements that make your home more livable – and the interest on these loans may qualify as a tax deduction.
If your mortgage loan balance exceeds 80 percent of the value of your property, you’re probably paying for Private Mortgage Insurance (PMI). The Protecting Americans from Tax Hikes Act of 2015 allows homeowners to deduct these premium costs from their taxable income for the 2015 and 2016 tax years, if your adjustable gross income (AGI) is lower than the thresholds.
If you sell your home this tax year, and the property has been your principal residence for at least two years, you can exclude up to $250,000 ($500,000 for married couples filing jointly) in profit from capital gains tax. If you’re thinking of selling but are a few months short of the full 24 months, it can pay off to wait it out to hit the two-year mark before selling.
If you purchase or refinance a home this tax year and pay points on your mortgage in order to lower your interest rate, the IRS allows you to deduct points either a) in the year you paid them or b) over the life of the loan (for refinances, in most cases).
If you’re a first-time homebuyer, you can use funds from your IRA to cover your down payment without paying the 10 percent penalty that normally applies to early withdrawals (prior to age 59.5). Even if you’ve purchased a home before, but not in the past two years, you can still take advantage of this benefit.
Additionally, homeowners must pay property taxes based on the assessed value of their property. While this is a cost that should be considered in the total cost of ownership, one advantage of paying property taxes is that they’re deductible on your federal taxes.
Both tax credits and tax deductions reduce your tax obligation, but not in quite the same way. Tax deductions reduce your taxable income, thus resulting in a lower income amount that’s subject to taxes. Tax credits, on the other hand, directly reduce the amount you owe the IRS, dollar-for-dollar. A $500 tax credit will reduce the amount of tax you owe by $500, while a $500 tax deduction reduces your taxable income by $500.
A tax deduction doesn’t offer uniform savings across the board, either. As a simplistic example (as other factors can influence the specific dollar amount saved), a taxpayer in the 35 percent tax bracket would save $175 with a $500 tax deduction, while a taxpayer in the 15 percent tax bracket would save just $75 from an identical $500 tax deduction. Therefore, tax credits offer a larger savings at tax time.
To become eligible for tax deductions and tax credits for making energy-efficient investments, you must first spend money on those improvements. To get the maximum benefit from energy-related tax breaks, homeowners must carefully plan and consider all factors in determining whether a particular investment will produce savings. In addition to the amount you’ll save on taxes, you should also consider how much money energy-efficient investments will save you in energy costs over time.
There are myriad tax credits available related to energy conservation, but some of these credits are available on a state-by-state basis, rather than nationally. To find out what energy-related tax credits are available in your state, use Energy.gov’s Tax Credits, Rebates & Savings search feature and select your state from the drop-down menu.
There are also a number of federal tax credits available that encourage homeowners to make investments that improve residential energy efficiency. These tax credits are available to homeowners who purchase ENERGY STAR products spanning 70 categories, such as:
- Roofing and insulation
- Geothermal heat pumps
- Central air conditioning
- Windows, doors, and skylights
- Gas, propane, or oil furnaces and fans
- And more
Not only does the purchase of an ENERGY STAR product qualify you for a tax credit (in many cases), but you’ll cut down on your energy consumption as well, and that means lower energy bills.
Even if your older appliances are still working fine, purchasing a newer, more efficient model might be worth it. With lower energy consumption, some new appliances can pay for themselves in a few years’ time through lower utility costs, especially when you consider potential tax credits in the year that you purchase qualifying ENERGY STAR products. Check out the energy efficiency rating (EER) on appliances such as your air conditioners, hot water heater, furnace, washing machine, and other energy hogs that could be driving up your monthly bills. If newer models have a much lower EER, upgrading might pay off.
Cutting down on energy costs isn’t only about appliances, of course. Other measures such as caulking and weatherstripping are a must. While these steps don’t typically come with tax advantages, they’re guaranteed to lower your energy bills by preventing drafts and air leaks that force your home heating and cooling systems work harder to maintain desired temperatures.
For the 2016 tax year, the Residential Energy Efficient Property Credit and the Nonbusiness Energy Property Credit are the primary federal energy-related tax breaks available to homeowners, with many energy-efficient upgrades, appliances, and improvements falling under one of the two programs. Most of these improvements must be placed in service before December 31, 2016 in order to qualify.
With so many possible tax credits and other savings opportunities, most homeowners don’t have the resources available to invest in a whole new set of ENERGY STAR appliances, home renovations to improve energy efficiency, solar panel installation, and other measures all at once. A home energy audit by a qualified professional can help you determine exactly where you can make the most gains in energy efficiency and recommend must-do improvements to eliminate energy waste.
Professionals conducting a home energy audit generally provide you with detailed documentation explaining precisely where you stand to benefit the most, even inspecting improvements after completion to ensure that they meet requirements. During a home energy audit, a technician will:
- Inspect doors and windows for leaks
- Perform a safety check on your furnace and hot water heater
- Examine duct work for leaks
- Inspecting your home’s insulation to verify that it’s up to code
- Replace energy-sapping lighting with energy-efficient light bulbs
- Assess faucets and shower heads, recommending slow-flow or low-flow options as needed
A home energy audit might reveal many opportunities to reduce your home’s energy consumption – and subsequently your energy costs. But replacing all of your home appliances, installing replacement windows and doors, re-insulating your home, and other improvements can easily add up to tens of thousands of dollars.
Knowing where your home is least energy-efficient provides a clear plan enabling homeowners to invest in the most beneficial improvements first – which will result in the most savings over time – and tackle less serious issues later. However, there are some options if you’d rather tackle all or most of your home’s energy needs at once.
One such option is the Energy Efficient Mortgage (EEM), a federally recognized loan program designed to help buyers purchase homes that are either already energy efficient or could be made more efficient through energy-efficient upgrades. For existing homeowners, the EEM can be used to fund energy-efficient improvements.
Existing homeowners can take advantage of this program to increase the value of their property prior to resale or to make improvements that will make your home more comfortable while actually saving you money over time. For existing homeowners, lenders have the ability to increase the value of an existing mortgage – resulting in a slightly higher monthly payment, but one often cancelled out through lower energy costs. While specific costs and savings may vary depending on the upgrades installed and other property- and loan-specific factors, the Department of Housing and Urban Development (HUD) offers the following example illustrating how an Energy Efficient Mortgage can actually lower the cost of home ownership:
The FHA Energy Efficient Mortgage is available in all 50 states and covers upgrades for both new and existing homes for buyers and homeowners who meet the criteria for FHA’s Section 203(b). Some additional benefits of the FHA EEM include:
- The ability to exceed typical loan limits
- No re-qualification required
- No additional down payment needed
Energy-efficient improvements are completed after closing, and the appraised value of the home is based on the property prior to upgrades. It’s not necessary for the appraised value to reflect the future value of the home with planned improvements, making this loan an attractive and affordable option for buyers or existing homeowners who want to make energy-efficient upgrades to reduce the cost of home ownership but lack access to capital to fund improvements.
If you’re in the market for a new home and an energy-efficient property has caught your eye, you might qualify for a larger mortgage loan amount through these types of green mortgage programs. If you’re a U.S. veteran, you can qualify for a VA Energy Efficient Mortgage that offers up to $6,000 in additional funding to make energy-efficient upgrades to a property.
An energy-efficient furnace, leak-free duct work, well-sealed doors and windows, and adequate insulation go a long way in reducing your home heating bills, but these measures aren’t the full savings picture. In fact, you can start saving some money on home energy costs before you even invest in any costly energy-saving improvements. And for those who rent their homes who are responsible for their home heating, cooling, and electricity bills, these simple steps can help you cut down on your total monthly costs even though you don’t own your home. Homeowners and renters can further reduce their home heating bills by:
- Making sure vents aren’t blocked by furniture, curtains, or other items
- Turn down your water heater’s thermostat – 110 to 120 degrees Fahrenheit is the recommended range
- Check your furnace filter frequently – replace it every three months or when visibly dirty
- Run your ceiling fan in a counter-clockwise direction, which will circulate warm air
- Set your thermostat to the Department of Energy (DOE) recommended 68°F during the day when you’re home and lower at night or while you’re away
It’s not just your heating costs that are being inflated by energy inefficiency, but your energy consumption as a whole. NRDC estimates that nearly one-quarter (23 percent) of the average home’s energy consumption comes from “energy vampires,” or idle load electricity, which refers to electronics devices that continue to use electricity even when they’re not in use. Your television, stereo, computers, and even your coffee maker are all likely culprits, contributing to wasteful spending of around $130 per year (or more) for many families.
The surefire way to solve this problem is to unplug all those devices when you’re not using them, but that’s not exactly an option for things like refrigerators – and most of us are generally in too much of a hurry and too forgetful to fiddle with plugs and outlets every time you want to use an electronic device. There are other solutions that can reduce the waste from your energy vampires, such as timers that cut the power at specific times, which can be useful for devices that you tend to use during a few specific hours each day (such as the television). You can also purchase a power meter, which can give you a better picture of what electronics are using the most electricity when they’re not in use.
You can also change the power options on many modern devices, setting them to automatically power down after a certain time, such as 30 minutes of inactivity. Additionally, disabling the “quick start” option on modern video game consoles and TVs can cut down on energy waste from these devices.
Power strips make it easier to cut the power to several devices at once with the flip of a switch, or you might consider a whole-house switch that instantly cuts the power to all controlled outlets with a single switch. Finally, if you’re in the market for a new TV, video game system, refrigerator, or any other device or appliance, look for ENERGY STAR-certified products, which are designed to use less energy in idle mode.
Believe it or not, you can even cut down on your energy consumption with some savvy landscaping. If you rent rather than own your home, always check with your landlord before taking on any major landscaping efforts. Planting shade trees strategically on the eastern and western sides of your home can cut down on your cooling costs over the summer by providing shade from the harsh rays of the sun. When you have large windows, unobstructed and in the direct path of the morning or afternoon sun, the heat increases the temperature inside your home, causing more work (and thus more energy consumption) for your home cooling system.
Shade trees can also help to keep your home warmer in the winter months. While the thought of raking piles and piles of leaves may seem daunting, consider the benefits shade trees offer in the summer. When the leaves fall in autumn, the sun is able to shine through the bare branches so that your home benefits from the warm sunshine that you aim to block in the warmer months. Evergreen conifer trees should be planted on the north and northwest sides of your home, which will help to break the wind from winter storms that can damage shingles and contribute to drafts around doors and windows.
When shopping for appliances or considering energy-efficient upgrades or other improvements for your home, you should also check for rebate offers. Many manufacturers and retailers offer rebates on certain products as part of a promotion, such as a $50 or $100 mail-in rebate for purchasing a specific type of washing machine or refrigerator. Rebate offers are always in flux, so the rebates available today may be different next week.
There are also rebates available to homeowners in the service area for some utility companies and local municipalities, again varying from location to location and company to company. For example, eScore is a program developed through a partnership between Tennessee Valley Authority (TVA) and local power companies, offering rebates for energy-efficient improvements performed by qualified contractors as well as rebate offers for the purchase of certain products (such as a $50 rebate for installing a new hot water heater) and financing options for homeowners who want to invest in more substantial energy-efficient upgrades.
Southern California Edison offers a variety of rebates for homeowners in the company’s service area, such as a $125 rebate for installing a smart thermostat, a $200 rebate for installing a variable speed pool pump and motor, or a rebate of up to $750 for installing an ENERGY STAR-qualified air conditioning system.
Qualifying Minnesota residents may be eligible for rebate offers facilitated through Energy Wise MN and local energy cooperatives for the purchase of energy-efficient products spanning a multitude of categories such as water heaters, lighting, heating and cooling, and more.
To find out what rebates and offers are available to you locally, you have a few options:
- The ENERGY STAR website offers a zip code search function to help you find energy-related rebates and offers in your area.
- Carrier Home Comfort, which offers a multitude of home heating and cooling products, provides a handy search feature that identifies rebates on specific products for your area by zip code. In addition to cash incentives, you can search for tax credits and financing options.
- The Database of State Incentives for Renewables & Efficiency (DSIRE) lists state-based incentives for renewable energy and efficiency-related products and improvements.
- PG&E provides a downloadable list of rebates and incentives available each year.
- Sites like Energy Upgrade California and Green Collar Crew Maryland are useful on a state-by-state basis to learn about the rebates and other savings opportunities available in your state. To find a state resource for your state, conduct a Google search for “YOURSTATE rebates and incentives for homeowners” or “YOURSTATE energy efficiency.”
- Consumers Energy offers a database of heating and cooling-related rebates.
The cost of home ownership is the largest expense many families face in their lives. With a bit of planning, a willingness to make smart upgrades, and some savvy savings strategies, you can cut down on the cost of home ownership significantly by taking advantage of tax benefits, rebates, and upgrades that will lower your home energy costs.
For more information about how you can save money through tax credits, rebates, and other opportunities, check out the following resources:
- Energy.gov: Tax Credits, Rebates & Savings
- EnergyTaxRebate.com: Federal Tax Incentives for Energy Efficient Homes
- RESNET: Energy Efficient Home Tax Credits & Mortgages
- AHRI: Federal Energy Efficiency Tax Credits
- Consumer Reports: Get money back for energy-efficient upgrades
- The Mortgage Reports: Get Tax Deductions For Owning A Home And Paying Your Mortgage
- ThisMatter.com: Residential Energy Tax Credits
- Energy-Efficient Tax Credits Set To Expire
- Geothermal Tax Credit Explanation
- Trane.com: Energy Tax Credits
- IRS Tax Map: Residential Energy Efficient Property Credit
- Non-business Energy Vs. Residential Energy Efficient Property Tax Credits – IRS Form 5695