Shelling out money for a new furnace can really ruin your day, no matter how much you're craving hot water. The good news is that in many cases you can take a tax deduction for all or part of the expense. Which deductions and how much depend on whether the property is your residence or income-producing rental property. Depreciation is restricted to rental properties, but for your own residence it adds to the basis -- the cost of your home -- reducing capital gains when you sell. Bottom line: keep the receipts.
Residential Rental Property
Depreciation means writing off the cost of purchasing new long-term use items over the course of the item's useful life, rather than a one-time expense taken in the year of purchase. You can write off annual depreciation costs against rental earned. The original furnace will be part of the building depreciation, but a new furnace starts depreciating the year purchased, and you write off a portion of the cost over 27.5 years, according to IRS charts.
Which Forms to Use
If you own residential rental property, use Form 1040 and Schedule E to record income and expenses. Form 4562 is where you'll calculate the depreciation and carry it over to Schedule E. Then you'll carry over your profit or loss on Schedule E to Form 1040. Form 4562 looks daunting, but it's not impossible to do yourself. The main building will be listed as Property 1 and the new furnace will be listed in Part III and depreciated separately. IRS Publication 527 (Residential Rental Property) has all the tables to calculate depreciation, but you'll have an easier job with tax preparation software, or use a tax professional.
Your Own Home Furnace
Don't despair if you can't write off a new furnace, because you still get a tax break when you sell the property. A new furnace is an "improvement," which means you add the cost of the furnace -- including labor -- to the purchase price of your home. When it comes time to sell, the cost of the improvements lower your profit -- capital gains -- so you'll pay less in taxes. In essence, you're getting a full deduction for the furnace in the year you sell, rather than the 27.5 years it takes for owners of residential rental property.
Energy-Efficient Furnaces: Green is Good!
Originally part of the American Reinvestment and Recovery Act, residential tax credits for energy efficient or solar heating systems expired in 2011. Homeowners could deduct up to 30 percent of the cost of energy-efficient improvements right off their tax bills. However, Congress may re-enact that portion of the stimulus package, so make sure the equipment would have qualified for the original credit. The contractor can verify eligibility. At the bare minimum, you'll save even more every month on your energy bills.
Non-Married Joint Property Owners
If you and your significant other own property together, you'll each claim a portion of the income and expenses on your individual tax returns, whether it's a primary residence or residential rental property. The amount each of you can claim is based on the ownership percentage. If you own 70 percent of the property and your partner 30 percent, prorate the deductions, depreciation or credit based on that ownership split.
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