You must complete IRS Form 5695 if you qualify to claim the non-business energy property credit or the residential energy-efficient property credit.
Non-business energy property credit
The non-business energy property credit can reduce your tax bill for some of the costs you incur to make energy-efficient improvements to your home. Your tax credit equals 10 percent of those costs, with a maximum total lifetime credit of $500 and a lifetime limit of $200 for windows portion.
Eligible costs include the purchase price and installation charges for efficient heating and air conditioning systems, water heaters and stoves that run on biomass fuel. You may also claim a credit for the purchase of energy-efficient doors, windows, skylights, certain roofs and the cost of increasing insulation in the home. However, you cannot include the installation costs for this equipment in the credit.
This credit is extended through December 31, 2020.
Residential energy-efficient property credit
In addition to the non-business credit, you may also claim the residential energy-efficient property credit on the same Form 5695 when you acquire alternative energy equipment for use in the home. The allowable credit is up to 30 percent of an unlimited amount of costs you incur to purchase and install solar electric systems, geothermal heat pumps, solar hot water heaters, wind turbines and fuel cell property. Before you purchase any of this equipment, be sure to check the manufacturer’s tax credit certification statement to ensure that its purchase qualifies you for the credit.
The credit for solar electricity and water heating, small wind energy, fuel cell, and geothermal heat pump property continues through 2023 with reductions in the credit beginning in 2020.
The residential energy credit is available for the improvements you make to any of your homes, whether it’s your principal residence or vacation home. However, to claim the non-business energy property credit, the improvements must be made to your main home.
Your main home is where you live for most of the time during the tax year and includes houses, houseboats, cooperative apartments, condominiums and even mobile homes. If you own more than one home and spend a significant amount of time at each, you may only claim the credit for improvements you make to one of them.
Reducing tax basis
Claiming either of the tax credits requires you to reduce the tax basis of your home by an amount equal to the total of both credits you claim. The tax basis of your home is essentially the price you paid for it or the cost to construct it.
Basically, lowering your basis will have the effect of increasing the gain (or reducing the loss) you’ll have to report when you sell the home. However, since the tax law excludes up to $250,000 of gain from the sale of a home (or $500,000 for couples filing jointly), the basis reduction is unlikely to have any adverse tax consequences for you. Regardless of the outcome, it’s a good idea to retain a copy of your Form 5695 until you sell the home.