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Energy Tax Credits

Monday, June 22, 2009
by Sam Miller

Sally Nelson of Nelson and Nelson CPA sent me an e-mail this morning that explains new tax incentives for energy efficient homes.  After reading Sally's e-mail I immediately saw the value in sharing this information with my clients and customers.  I hope you enjoy the information and feel free to forward this page to your friends.

ENERGY CREDITS
 
Summer may be when we think about home improvement issues, and so it is a good time to review the rules for the tax credit for energy efficient property.
 
The tax credit took a year off in 2008, but a new and improved version is back for 2009 and 2010.  The new credit is based on 30% of costs for qualified property, up to a maximum of $1,500.  Prior year credits taken do not affect this new maximum. Qualified property is property that is certified by the manufacturer to meet the required standards.  The standards are so specific that without the manufacturer's certificate, it would be hard to tell if a given item qualifies for the credit or not.  So it is best to ask about this up front, before you make any decision, and keep the certificate in your permanent records.
 
Energy Efficient Equipment includes
        Electric heat pump water heaters
        Natural gas, propane, or oil water heaters 
        Stoves using biomass fuel to heat a residence or water heater
        Advanced main air circulating fans
        Central air conditioners/furnaces
 
Building Envelope Components ("installed in a manner consistent with the manufacturer's certification") include
        Insulation 
        Exterior windows, skylights, doors  
        Caution:  After 5/31/09, an Energy Star label alone will not suffice to prove that these  items qualify.
        Metal roofs with pigmented coatings
        Asphalt roofs that have cooling granules (2009 only)
 
As before, the property must be used on the taxpayer's principal residence located in the United States.  The property must be new, and in the case of a building envelope component, must be expected to last at least five years.  (A manufacturer's two-year warranty at no extra charge can be taken as evidence of durability.)  The date that the expenditure qualifies is when the property is completely installed. Equipment costs can include the price of installation, however not in the case of building envelope components.  Further, the envelope component must be specifically and primarily designed to reduce heat loss or gain in order to qualify:  the fact that a component (siding, for example) might have an incidental beneficial effect does not count, since its main purpose is an unrelated function. (To confuse things, siding purchased with a manufacturer's certificate before 6/26/06, did count under the prior credit rules.) 

Circular 230 Disclosure:  Pursuant to regulations of the US Department of Treasury, it is required that we advise you that this newsletter is not intended to be used for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code on the taxpayer. 

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Year End Tax Update

Thursday, December 4, 2008
by Sam Miller

Sally Nelson and her team of tax specialists at Nelson & Nelson provided me with some very valuable tax updates today.  I was very excited to see that these updates apply directly to real estate and home ownership.  I contacted Nelson & Nelson CPA's and asked their permission to share their tax update with you in my blog and they happily agreed.


Year End Tax Update

Before year end we want to expand on our discussion of the new homebuyer tax credit provision that we touched on in a previous letter.  It is a new and untried concept, so there will probably be unforeseen situations that will need to be worked out as they arise, but for now - this is what is known! 
 
First-Time Homebuyer Tax Credit
The important thing to remember about this interesting provision, is that it is really a government loan that taxpayers can use to finance a home purchase.  There are many stipulations:
    
1)  The definition of "first-time" is that the taxpayers did not own a residence during the 3 year period before the purchase.
 
2)  Residence means principal residence - not a vacation or second home.
 
3) The benefit is phased out at certain modified adjusted gross income levels
            Single taxpayers                             $75,000-$95,000
            Married taxpayers, filing joint       $150,000-$170,000
 
4) So far this only applies to houses purchased after 4/9/08 and closed  before 7/1/09, however a house bought in the 2009 period can be claimed on a 2008 extended or amended return, to accelerate the receipt of cash.
 
5) The credit is limited to the lower of $7,500 ($3,750, for married filing separate) or ten percent of the purchase price (e.g. a $60,000 house would result in a credit of $6,000)
 
The way it would work is that taxpayers would claim the credit on the tax return for the year of purchase.  It would first be applied to any tax on the return.  Any extra, not needed to pay tax, would be refunded.  If the taxpayer had other credits and withholdings to pay his/her tax, all the credit would go into the refund.   This credit-loan would have to be paid back, over a 15 year period starting the 2nd year after the credit was taken.  It would get paid back as an addition to the taxes owed for those 15 years.  The good thing is that it is interest free.  As an example, if $7,500 were taken in 2008, an additional $500 would get added to the tax bills for 2010-2024.
 
 So, what happens if....
       The taxpayer dies?    Payback ceases, the surviving spouse owes just ½ the balance.
       The taxpayers get divorced?  Payback is the responsibility of the spouse receiving the home.
       The house is sold?  Payback is completed in year of sale, however the payback cannot be more than the gain on the house.
        The house is bought from a close relative?  The credit does not apply.
 
This could be a very advantageous benefit for qualifying taxpayers.  

Other Real Estate Provisions. 
 On the 2008/9 returns, taxpayers can deduct up to $500 (if single) or $1,000 (married, joint) of real estate taxes in addition to their standard deduction.  Normally this is only a benefit for itemizers.  
 
As you know, a gain on the sale of a personal residence is excluded from tax if less than $500,000 ($250,000 if single), as long as the taxpayers have lived in it for 2 out of the last 5 years. If the house had also been used for business or rental, the depreciation taken was recaptured as taxable income at the time of sale, but otherwise the entire gain was excluded.  Now, beginning with 2009, any business use after 1/1/09 will require that the gain be apportioned between personal and business, with the business portion not being eligible for exclusion.  So that means keeping track of those home improvements again, to establish basis if needed. 

Mineral Rights Transactions  
      Whether the sale or lease results in capital gain or ordinary income depends on the nature of the transaction:
     1) Outright sale of the mineral rights on a piece of land is a capital gain transaction.  The gain will be the full amount of the sale, because ordinarily the basis of mineral rights is "0", unless determined at the time of purchase.
    2) If the rights are leased, the landowner receives royalty income, which is ordinary income.  A depletion deduction is allowed.
    3) A sale of right-of-way or easement, that is perpetual and can never revert back to the grantor, is a capital gain transaction.
    4) A payment for use of surface land is rent (ordinary income)
    5)  A working interest in an oil or gas well is considered business income, subject to self-employment tax.

 



 

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