Tax Credits for New Home Construction

Are you building a new home?

new home construction

For aspiring homeowners, building a new home is an exciting venture.

Besides creating the house of their dreams, there’s now an added incentive for those planning to embark on new home construction in 2023 and 2024.

There are tax credits and tax breaks that can significantly reduce the financial burden.

In this article, we will explore the various tax incentives available to eligible homeowners and how they can claim tax credits to help build their dream homes while saving money.

Table of Contents

New Home Energy-Efficient Tax Credits

energy efficient house

While there are no specific federal tax credits in the United States exclusively targeting new home construction, there are tax credits related to home construction and energy efficiency.

These tax credits can benefit homeowners, including those who build new homes. When you’re filing your taxes, be sure to claim these valuable Energy Tax Credits.

Here is a list of residential energy tax credits you can claim for new home construction:

  1. Residential Clean Energy Tax Credit: This federal tax credit applies to the installation of renewable energy systems in homes, including solar panels, wind turbines, geothermal heat pumps, and solar water heaters.

    If you build a new home and include eligible renewable energy systems, you may qualify for a tax credit worth up to a certain percentage of the installation costs.

  2. Residential Energy Efficient Property Credit: This credit applies to the installation of certain energy-efficient technologies, such as solar panels and small wind turbines.

  3. Energy-Efficient Home Improvements Tax Credit: If you incorporate energy-efficient features during the construction of your new home, such as ENERGY STAR-rated windows, doors, or HVAC systems, you can still be eligible for this tax credit.

    The goal of the Energy Star Tax Credits is to incentivize homeowners to make energy-efficient upgrades to their homes, helping to reduce overall energy consumption and promote the use of cleaner, renewable energy sources.

Qualified Energy Star Tax Credits

Energy Star tax credits are incentives provided by the government to encourage homeowners and businesses to make energy-efficient improvements to their properties.

These tax credits are available in the United States and have been introduced to promote the use of energy-efficient products and technologies, thereby reducing energy consumption and greenhouse gas emissions.

Here is a list of energy star tax credits you can claim for new home construction:

  • Central air conditioning – The criteria for a $300 tax credit are met by air conditioners that have earned the ENERGY STAR Most Efficient designation.
  • Certified heat pumps – Certified heat pumps are eligible for $300.
  • Gas, propane, or oil boilers – Most Efficient gas boilers satisfy the standards for this $150 tax credit, which also covers installation expenses.
  • Natural gas, propane, or oil furnace – Gas furnaces that are ENERGY STAR certified (apart from those that are just for the South of the United States) satisfy the criteria for the $150 furnace tax credit. Fans that satisfy the criteria for the $150 fan tax credit are included in gas and oil furnaces.
  • Advanced main air circulating fans – To be eligible for $50, this fan must use no more than 2% of the total energy used by your furnace.
  • Water heaters (non-solar) – The majority of water heaters qualify for $300. (i.e. those with an energy factor of 2.2 or more). The $300 credit is also available for water heaters using gas, oil, or propane that have a thermal efficiency of at least 90% and an energy factor of 0.82 or higher.
  • Windows, Doors, and Skylights – You are qualified for 30% of the cost (excluding installation) of any windows, doors, or skylights you replaced or installed if they have earned the ENERGY STAR, up to a maximum of $500 for doors and $600 for windows and skylights. If you added a window or door when there wasn’t one before, you can also claim the credit.
  • Roofs (Metal and Asphalt) – A credit of 30% of the cost, up to $500, is available for roofing materials that meet the requirements and have the proper pigmented coatings and cooling granules. This credit does not cover installation costs.
  • Insulation – Standard bulk insulation items such as batts, rolls, blown-in fibers, rigid boards, spray foam, and pour-in-place can be eligible for up to $600 in cost-savings, or 30% of the cost, excluding installation fees. You can still receive credit if you decide to install the insulation/home sealing goods yourself.
  • Products that air seal  – Products that  reduce air leaks can also qualify, as long as they come with a Manufacturer’s Certification Statement, including Weatherstripping, Spray foam in a can, designed to air seal, Caulk designed to air seal, and House wrap

It’s important to note that tax laws can change over time, and new legislation may be introduced to encourage home construction or energy efficiency.

Additionally, some states may offer tax credits or incentives for new home construction and energy-efficient features.

First-Time Homebuyer Programs

For first-time homebuyers, constructing a new home presents an excellent opportunity to benefit from exclusive tax breaks and programs.

These programs aim to make the process of buying or building a new home more accessible, particularly for those with limited financial resources.

Typically, first-time homebuyer programs include tax credits, down payment assistance, and reduced interest rates on mortgage loans.

Some programs might also provide grants to cover specific construction costs.

As each program’s requirements and benefits vary by state or region, aspiring homeowners should explore multiple options to determine the most suitable one for their needs.

Here are some common types of first-time homebuyer programs:

  • Down Payment Assistance Programs: These programs offer financial assistance to cover a portion of the down payment required to purchase a home. The down payment is typically a significant barrier for many first-time buyers, and these programs help reduce the upfront costs, making homeownership more achievable.
  • Low-Interest Mortgage Loans: First-time homebuyers may be eligible for special mortgage loans with lower interest rates compared to standard loans. These lower interest rates can result in substantial savings over the life of the mortgage.
  • Federal Housing Administration (FHA) Loans: The FHA offers mortgage loans with lower down payment requirements and more lenient credit criteria, making it an attractive option for first-time buyers. With an FHA loan, borrowers may be eligible for a down payment as low as 3.5% of the home’s purchase price.
  • Fannie Mae and Freddie Mac Programs: Fannie Mae and Freddie Mac are government-sponsored enterprises that offer conventional loans with competitive interest rates and down payment options. First-time homebuyers can benefit from special programs like HomeReady (Fannie Mae) and Home Possible (Freddie Mac) with reduced down payment requirements and flexible eligibility criteria.
  • Department of Veterans Affairs (VA) Loans: VA loans are exclusively available to eligible veterans, service members, and surviving spouses. These loans offer no down payment and generally have more lenient credit requirements, making them an excellent option for qualified first-time homebuyers who have served in the military.
  • United States Department of Agriculture (USDA) Loans: USDA loans are designed to help low-to-moderate-income borrowers purchase homes in eligible rural areas. These loans offer 100% financing, meaning no down payment is required, and they often come with competitive interest rates.
  • Mortgage Credit Certificates (MCCs): MCCs are tax credits that help reduce the amount of federal income tax owed by first-time homebuyers. The credit is calculated based on a percentage of the mortgage interest paid each year, providing additional savings.
  • Forgivable Loans: Some programs offer forgivable loans to first-time homebuyers, which means a portion or the entire loan amount is forgiven after a specified period, usually if the homeowner remains in the property for a certain number of years.
  • Grants for Closing Costs: First-time buyers may be eligible for grants to cover part or all of their closing costs, which can significantly reduce the upfront expenses associated with buying a home. 
  • Homebuyer Education Programs: These programs provide educational resources, workshops, and counseling to help first-time buyers navigate the home buying process with confidence and make informed decisions.
  • State Housing Finance Agency (HFA) Programs: Many states have their own housing finance agencies that offer various first-time homebuyer assistance programs. These may include down payment assistance, low-interest loans, and closing cost assistance. Each state’s HFA programs will have different eligibility criteria and benefits.
  • Government-backed Loans: Government entities offer loans with more lenient credit requirements and lower down payment options to assist first-time homebuyers with limited financial means.

To access these First-Time Homebuyer Programs, potential buyers should research available options in their state or local area.

They can also reach out to a HUD-approved housing counseling agency or consult with a local mortgage lender to explore the best program for their specific financial situation and homeownership goals.

Regional Incentives and Rebates – Capitalizing on Local Opportunities:

In addition to national tax credits and programs, many regions and municipalities offer incentives and rebates to encourage new home construction.

These localized incentives can include property tax reductions, waived construction fees, and support for infrastructure improvements related to new developments.

Stay informed about regional announcements and work closely with your builder to ensure you meet all requirements for these regional benefits.

Taking advantage of local incentives could lead to substantial cost savings during the construction process and beyond.

Interest on a Construction Loan

If you took out a construction loan to build your home, then chances are you paid interest on that loan.

The interest on a construction loan may be tax-deductible, but the rules and eligibility criteria can be complex and vary depending on the specific circumstances.

To determine if you can deduct construction loan interest, consider the following factors:

  1. Type of Construction Loan: The interest deduction eligibility might depend on the type of construction loan you have. There are generally two types of construction loans: construction-to-permanent loans and standalone construction loans. Each may have different rules regarding interest deductibility.

  2. Intended Use of the Property: The tax deductibility of construction loan interest might be influenced by the intended use of the property. If you are building a primary residence, the interest may be deductible under certain conditions. However, if the property is intended for rental or investment purposes, different rules may apply.

  3. Time Frame for Construction: The interest on a construction loan used to build or substantially improve your primary residence may be deductible during the period when the home is being constructed. After construction is complete and you convert the loan into a permanent mortgage, the interest on the mortgage may also be eligible for deduction.

State Sales Tax

When you purchased building materials, you may have paid state sales tax.

If the amount you paid was larger than the amount of your local or state income tax, you can deduct the state sales tax you paid from the amount you pay to the Federal government.

Again, this is an itemized deduction. You also can’t take the local and state deduction for income tax if you take the state sales tax deduction.

How to Claim New Home Construction Tax Credits and Breaks

Claiming new home construction tax credits can be a complex process, as it depends on the specific tax credit and the country or region where you are building the home.

We’ll provide an outline of the steps you need to follow to claim new home tax credits in the United States.

  1. Determine Eligibility: First, ensure that you meet all the eligibility criteria for the specific new home construction tax credit you intend to claim. Different tax credits have different requirements, such as income limits, property location, energy efficiency standards, and more.

  2. Keep Detailed Records: Maintain meticulous records of all construction-related expenses and documentation, such as receipts, invoices, and construction contracts. These records will be essential when calculating the tax credit and supporting your claim.

  3. Complete the Construction: Ensure that your new home construction is completed and meets all the necessary criteria for the tax credit. For example, if you are claiming an energy-efficient tax credit, ensure that your home includes all the qualifying features and meets the required standards.

  4. Obtain the Necessary Forms: Check with the tax authorities or the Internal Revenue Service (IRS) to determine which tax forms you need to use to claim the specific tax credit. Commonly used forms might include Form 5695 for Residential Energy Credits or Form 1040 for general tax credits.

  5. Complete the Tax Forms: Accurately fill out the required tax forms, providing all the necessary information about your new home construction and related expenses.

  6. Calculate the Tax Credit: Based on the information provided, calculate the tax credit amount you are eligible to claim. Be sure to double-check your calculations and verify that you have claimed all eligible expenses.

  7. File Your Taxes: When you file your tax return, include the completed tax forms and any supporting documentation related to your new home construction tax credit claim.

  8. Review and Seek Professional Advice: Before submitting your tax return, carefully review all the information to ensure accuracy. If you have any doubts or uncertainties, seek advice from a tax professional who can assist you in claiming the tax credit correctly.

Finally, remember online tax preparation and filing will check the requirements of any Federal or State tax credits and tax breaks to ensure you qualify and that you claim them correctly.

They also provide all the correct tax forms and fill them out for you, so you don’t have to.

FAQs

What are Energy-Efficient Home Construction Tax Credits?

Energy-efficient home construction tax credits are incentives provided by the government to encourage builders and homeowners to incorporate energy-saving features into their new homes. These features can include energy-efficient appliances, windows, insulation, and HVAC systems.

How do energy-efficient home construction tax credits work?

These credits offer a percentage of the cost of energy-efficient upgrades as a tax credit. The exact amount varies based on the upgrades made and the tax laws in effect during the construction year.

What types of energy-efficient features qualify for tax credits?

Features such as solar panels, geothermal heat pumps, solar water heaters, energy-efficient windows, doors, insulation, and high-efficiency HVAC systems can often qualify for tax credits. The specific requirements can vary based on federal and state regulations.

Is there a maximum credit amount for energy-efficient home construction?

Yes, there are usually maximum credit limits for each type of upgrade. For instance, solar energy systems may have higher credit limits compared to other upgrades. It’s essential to check the current tax laws for the most accurate information.

Are these tax credits available for all newly constructed homes?

Not necessarily. These tax credits might only apply to homes that meet specific energy efficiency standards and have the qualifying features installed.

Do state governments offer similar tax credits for new home construction?

Yes, many states have their own energy-efficient home construction tax credit programs, which can vary in terms of eligibility criteria, credit amounts, and application procedures.

Can these credits be carried forward to future tax years?

Some tax credits can be carried forward if you cannot use the entire credit in the current year. Review the specific credit details for information on carryforward options.

How do I claim these tax credits during the tax filing process?

You’ll typically need to complete the appropriate tax forms and attach any required documentation, such as manufacturer certifications, to your tax return.

Is there a specific timeline for claiming these tax credits?

Yes, you need to claim these credits on your tax return for the year in which the qualifying improvements were made.

Do state governments offer similar tax credits for new home construction?

Yes, many states have their own energy-efficient home construction tax credit programs, which can vary in terms of eligibility criteria, credit amounts, and application procedures.

How can I find out which energy-efficient upgrades qualify for tax credits?

The IRS website and official state tax agency websites provide information on eligible upgrades and their corresponding credits. You can also consult tax professionals or contractors familiar with energy-efficient construction.

Are these tax credits available indefinitely?

Tax credits for new home construction are often subject to expiration dates. Some credits might be extended, while others might end after a specific timeframe. Staying informed about legislative changes is crucial.