Tax Write-Offs When Building a New Home

Home construction offers both federal and state tax benefits.

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Several tax breaks are available to you if you are building a new home. These tax breaks come in two forms: tax credits and tax deductions. You deduct the amount of a tax credit from the amount you have to pay, while you subtract the amount of a deduction from your taxable income.

Construction Loan Interest

If you itemize your deductions and you took out a construction loan to build your home, you can deduct the interest you pay during the first 24 months of the loan. This deduction only applies, however, if the home will become your primary or secondary residence once you move in. Furthermore, the deduction applies only to the first $1 million in total loan proceeds, including interest. This limit is reduced to $500,000 if you are married and filing separately.

State Sales Tax

If you paid state sales tax on the purchase of building materials and the amount you paid was greater than the amount of your state and local income tax, you may deduct the amount of your state sales tax amounts from your federal taxable income. This is an itemized deduction. It cannot be used in conjunction with the state and local income tax deduction -- you must choose one or the other.

Federal "Green" Tax Credits

Two federal "green" tax credits for home builders apply through the end of 2016. The first credit, which applies to the installation of geothermal heat pumps, small wind turbines and solar energy systems, amounts to 30 percent of your cost with no upper limit. You can use it for both your primary residence and a second home. You can also earn a tax credit for installing qualifying fuel cells and microturbine systems. This credit amounts to 30 percent of your cost, up to $500 for each half-kilowatt of power capacity. You can use this credit for for your primary residence, but not for a second home.

State "Green" Tax Breaks

Many state and local governments offer state income tax credits and deductions for a variety of environmentally friendly home-construction practices. Common tax breaks include savings for installing energy-efficient solar heating, insulation, air conditioning, lighting and water heaters. Standards vary considerably from location to location, however. Some tax breaks are available only locally, and some are not available for residential buildings.

Claiming Tax Breaks

You can claim federal income tax credits and deductions on Form 1040. Remember that you cannot claim the standard deduction if you are claiming itemized deductions. You can, however, claim the standard deduction even if you are claiming tax credits as well. If you are claiming an IECC-based credit, you must also file Form 8908. Filing requirements vary for state tax breaks.