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. Plus, 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. As a result, many homeowners look for opportunities to find some home savings.
However, homeowners do have several advantages over those who rent their homes. For example, homeowners build equity over time as you pay down your mortgage. Plus, with favorable market fluctuations that increase the value of your property, home ownership can be a wise long-term investment. Additionally, many towns and states offer 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 helps offset the costs of maintaining your home. Plus, these incentives help provide extra savings needed for future renovations. As a result, continually improving your property helps increase the overall value of your home. Finally, everyone (even renters) can reduce their monthly expenses by cutting down on energy consumption and the resulting utility costs.
What You’ll Find in This Guide
This guide contains information on many tax credits, rebates, and other home savings opportunities. As a result, this information helps homebuyers and homeowners cut energy costs and reduce the cost of home ownership. There are myriad ways for homeowners to reduce their tax burden and make energy-efficient upgrades, including:
- special lending programs.
- tax advantages for purchasing qualified, energy-efficient products.
- tax deductions for mortgage costs.
- and more!
Ultimately, the best thing about these programs is that they pay for themselves over time in energy savings.
Of course, the available tax credits and deductions are subject to change from year to year. Verify any credits or deductions with the IRS or your tax preparation professional before filing 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 home savings opportunity 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.
For example, homeowners must pay property taxes based on the assessed value of their property. While taxes remain part of the total cost of ownership, property taxes are deductible on your federal taxes.
Mortgage Interest Deduction
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.
Capital Gains Provisions
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. Therefore, for homeowners a few months short of the full 24 months, consider waiting a few months, which meets the two-year ownership requirement.
Additionally, for those that purchased or refinanced a home this tax year and paid 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).
First-Time Homebuyer Savings
For first-time homebuyers, 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.
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. For example, a $500 tax credit reduces the amount of taxes owed by $500. Conversely, a $500 tax deduction reduces your taxable income by $500.
Take Advantage Tax Deductions
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.
Take Advantage of Tax Credits
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.
Typically, ENERGY STAR products qualify you for a tax credit (in many cases). Plus, you’ll cut down on your energy consumption as well, and that means lower energy bills.
Take Advantage of Energy Savings
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.
Energy Efficient Mortgages
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:
FHA Energy Efficient Mortgages
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
Watch Home Energy Consumption
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. This 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. However, this isn’t exactly an option for things like refrigerators. Plus, we are too busy or forgetful mess with plugs and outlets for everyday usage. Therefore, there are other solutions that help reduce the waste from your energy vampires. For example, timers cut the power at specific times, which works for devices used during specific hours. Also, power meters provide a better picture of what electronics are using the most electricity when not in use.
Change Power Options
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 video game consoles or TVs cuts down on wasted energy.
Utilize Power Strips
Power strips make it easier to cut the power to several devices at once with the flip of a switch. Alternatively, a whole-house switch instantly cuts the power to all controlled outlets with a single switch. Finally, for new devices (such as TVs, video game systems, refrigerators) look for ENERGY STAR-certified products. These products are designed to use less energy in idle mode.
Understand Landscaping Options
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 cuts down on your cooling costs over the summer by providing shade from the harsh rays of the sun. Additionally, homes with large windows with direct sunlight naturally creates an increased temperature inside your home. This causes more work (and thus more energy consumption) for your home cooling system. Shade trees help reduce the natural heat generated by the sun increasingly your home temperatures.
Shade trees keep your home warmer in the winter months. Although raking piles of leaves seems daunting, the trees offer benefits during 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.
First, check for rebate offers when shopping for appliances, considering energy-efficient upgrades or other improvements. Many manufacturers and retailers offer promotional rebates on certain products. For example, a $50 or $100 mail-in rebate for purchasing a specific type of washing machine or refrigerator exist. However, rebates are always in flux, so check frequently.
Utility companies and local municipalities also offer rebates. For example, eScore developed through a partnership with local power companies. The program offers rebates for energy-efficient improvements performed by qualified contractors. Plus, rebate offers for the purchase of certain products (such as a $50 rebate for installing a new hot water heater). Additionally, certain programs offer financing options for homeowners investing in more substantial energy-efficient upgrades.
To find out your local rebates and offers, 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 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.
- To find state resources, 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. Yet, with some planning and making smart upgrades everyone can generate some savvy savings. Many homeowners reduce their costs significantly by taking advantage of tax benefits, rebates and upgrades that lower home energy costs.
For more, check out the following resources to save money through tax credits, rebates, and other opportunities:
- 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