Making upgrades to your rental property that are energy efficient can cut down on ongoing costs, but the savings don't stop there. Tax benefits connected to the installation of upgrades like solar panels, wind power, and green roofs can cut down on the cost of installing equipment and appliances. These upgrades will not only reduce your energy bill, but they will also make your property more attractive to prospective tenants.
The American Recovery and Reinvestment Act
The 2009 American Recovery and Reinvestment Act features many tax benefits for homeowners and rental property owners who make energy upgrades on their property. The American Taxpayer Relief Act of 2012 extended many of these tax benefits until 2016. These acts cover a broad range of installations and upgrades, including:
For these upgrades, you can recoup 30 percent of the cost of your energy upgrade via a tax credit. However, there’s a catch: the credit can only used on your primary residence, vacation home, or second home. As a result, rental property owners may not be able to take advantage of this tax credit, but landlords who rent out their second home or vacation home part of the year can still benefit.
If you qualify, the tax credit is calculated based on the amount of time you spent in the property. For example, if you live in your second home six months out of the year, then you can take 50 percent of the 30 percent discount for your energy savings upgrade. It’s also important to remember that this tax credit must be taken the same year that you install an energy-efficient upgrade.
Local Tax Credits
There are often local acts that allow landlords to take advantage of energy tax breaks and credits. For example, California provides tax rebates to multifamily property owners through its Energy Upgrade California program. This program offers $750 in rebates to property owners who want to install energy-efficient upgrades to their property, and technical advice about the installation is also provided.
In New York, property owners can receive a tax abatement of up to $4.50 per square foot for installing a green roof. The maximum amount you can claim for your tax abatement is $100,000 per property. Check out the local acts in your state to find out if you qualify for more savings!
Depreciating Energy Efficient Upgrades
While property owners may not be eligible for all federal energy-efficiency tax credits, all rental property owners can receive tax deductions for energy upgrades through depreciation. Depreciation refers to the natural wear and tear a property endures over time. Each year, the IRS allows you to deduct the cost of your property and any investments made into it through depreciation. Any energy upgrades can then equal tax savings like other improvements made on your property throughout the year. However, applying depreciation to your tax returns can be complicated, so you'll probably want to consult with an accountant if you want to take advantage of this benefit.
Understanding how to take advantage of tax benefits that are available when you upgrade your rental property to be more efficient is difficult even for a seasoned landlord. When you take on the expense of adding green energy options to your rental property, be prepared to consult a tax expert when filing taxes for the year during which you made these additions. Your profits will be maximized when you use this method to keep tax liability under control.
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