When to Take Advantage of Tax Credits for Home Improvement Projects

Is 2022 a good year to renovate your home? Maybe—and maybe not. 

Although some homeowners may choose to make necessary repairs—in our home, for example, we recently shopped for dishwashers to replace a ten-year-old appliance that no longer worked—it might not be the best time to tear up your kitchen or rebuild your back patio.

Why? It all comes down to cost. According to the most recent report from the U.S. Bureau of Labor Statistics, the Consumer Price Index is currently 8.5% higher than it was last year. That means everything is 8.5% more expensive, on average—and some categories of consumer spending are even more expensive. Groceries, for example, have seen a 13.5% increase. Household furnishings are also beating the average, with a 9.3% increase over the past twelve months.

This hurts homeowners in two ways. First of all, it increases the day-to-day expenses associated with making a house a home. Whether you’re buying a new dishwasher or refreshing your bedroom with a new set of sheets and a cuddly throw, you’re likely to pay a little more than you would have if you’d bought last year—and you might end up paying more than you would if you waited until prices went down.

Second of all, inflation increases the cost of everything else—especially food—leaving you less money in your budget to put towards home improvement.

Enter the Inflation Reduction Act. You may have heard of this landmark piece of legislation, passed in August 2022—but you may not know how the IRA can help homeowners save money.

Upgrade and save

Want to use the IRA to save money on home upgrades? Think green. The Inflation Reduction Act offers tax credits and rebates to homeowners who make certain types of energy-efficient home improvements. 

"There are a few potential tax incentives available to homeowners if they make specific upgrades," explains Lauren Anastasio, Director of Financial Advice and CFP at Stash. "Two new tax credits will be available starting in 2023, and two rebate programs could be available as soon as 2023."

Tax credits

 "The tax credit programs each offer up to a 30% tax credit to offset the costs of installing energy efficient upgrades. The nonbusiness energy property credit is worth up to $1,200 per year for upgrades such as energy-efficient doors or windows. The residential clean energy credit would apply to renewable energy upgrades like solar panels. Tax credits are applicable when you file your tax return for the year the project is completed—this means the earliest you could expect to receive the credit would be early 2024 for upgrades you complete in 2023. Upgrades completed in 2022 are not eligible, but you can still start the project prior to year end."

Rebates:

"Unlike the tax credits, the rebate programs can offer some upfront savings, though these programs will likely not be available until later next year. These rebates can be applicable for upgrades to your HVAC system, or the purchase of high-efficiency electric appliances like a water heater or heat pump. If these are items in your home you’re considering upgrading, you may want to hold off until spring 2023 to confirm your state has the rebate program in place." 

These credits and rebates may give homeowners an incentive to start home improvement projects they’ve been putting off—but since the IRA gives homeowners a full decade to take advantage of these incentives, you may save even more money if you wait.

"An HVAC system lasts between 15 and 25 years, with efficiency improving all the time," explains Mindy Jensen, co-host of the BiggerPockets Money podcast. "A 25-year-old furnace is going to cost more to operate than a brand new furnace, but an existing furnace costs $0 to install, vs the $8,000-$12,000 to install a new one. So if your furnace is older but still running, it doesn't make financial sense to replace it now, just to get a tax credit." 

Jensen offers personal finance and real estate advice on a weekly basis in her role at Bigger Pockets—which is, of course, one of the biggest real estate investing resources out there—so she knows what she’s talking about. 

Budget before you buy 

If you’re thinking about taking advantage of the home renovation opportunities offered by the Inflation Reduction Act, make sure you budget before you buy. Putting home upgrades on credit cards is nearly always more expensive than paying in cash—and since these tax credits and rebates are going to be around for the next 10 years, there’s plenty of time to build up your home improvement fund.

Here’s Jensen’s budgeting advice for homeowners who want to invest in renovations that might qualify for IRA tax credits and rebates:

CapEx

 "In real estate investing, there is an expense called CapEx or Capital Expenditures. These are your big-ticket items that don't come up frequently: your roof, HVAC, and even appliances. You put away a little each month into your CapEx fund, so when it's time to pay for the repair, you're not scrambling to find the funds. The amount you put into the fund is based on the age of the item, the estimated timeline for repair and the estimated cost of repair. Using the $12,000 above for the HVAC system, and assuming you'll need to replace it in 5 years, you should be putting away $2,400 per year or $200 per month for the HVAC system. The same logic can be used with any large repair."

By saving money now—whether you use Jensen’s CapEx plan or simply put aside whatever you can afford at the end of the month—you’ll not only avoid going into debt for your home renovation expense, but you might also save money when it’s time to make the purchase.

Hold out for next-generation tech 

There’s one more way to save money with the IRA—and that’s by waiting for the next generation of energy-saving technology to hit the market.

Take energy-saving heat pumps, for example. Although you could get a potential rebate by purchasing a heat pump in 2023 or 2024, you could save even more money by holding out until the next generation of heat pumps are ready for purchase. "Heat pumps are great, but they're a new technology," says Jensen. "That means they’re very expensive to install—my quote was $26,000 where a furnace was $8,000." Once heat pumps become more established, they’re likely to become more affordable.

Same goes for solar panels. You could get a tax credit now, or you could wait—and Jensen suggests waiting. "Solar panels have come down in price over the years, and the efficiency has improved greatly as well, but they still aren't a great financial decision for most people," Jensen explains. When Jensen and her husband installed their solar panels last year, it cost them $12,000 to do the job themselves; it would have cost over twice that much if they’d paid for the installation. They received a $3,000 tax credit, bringing their total expense down to $9,000—but Jensen still estimates it’ll be four or five years before the energy savings offered by the panels offset the cost of the install.  

What does that mean for you? "The money-savvy homeowner will wait for solar panels," says Jensen, "and invest in a solar farm to help offset their carbon footprint if they want to do good for the earth."

Renovate or wait?

 The expert advice—from both Jensen and Anastasio—seems to suggest that homeowners should hold off on taking advantage of Inflation Reduction Act tax incentives, at least for now. Wait until you know whether your state is offering certain rebates, wait until you have your CapEx fund set up, and wait until the next generation of the newest energy-efficient technologies arrives.

The Inflation Reduction Act tax credits and rebates should be effective through the end of 2032, so you’ll have plenty of time—and if you want to do your part to reduce inflation today, keep in mind that the best way to drive prices down is by postponing your purchases.

Unless your ten-year-old dishwasher breaks, of course. Then you can get a new one. 

Photo by Klaus Vedfelt/Getty Images

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