Tax Credit for Energy-Efficient Windows: What Homeowners Should Know

You depreciate personal property in a building, such as furniture, carpeting, and removable partitions, over seven years. Differences with Qualified Leasehold ImprovementsThe QIP definition is similar to that of Qualified Leasehold Improvements; however, there are subtle but distinct differences to note. For one, Qualified Improvement Property does not have the Qualified Leasehold Improvements requirement that a building must have been placed in service at least three years prior to the expenditure.

Making a Depreciation Election

The NFRC label, which indicates that your windows meet the minimum performance thresholds, is all that counts. Some of the most affordable window lines from major manufacturers now offer models that qualify, so you don’t necessarily need to buy the most expensive option to get the credit. Based on current tax law, it is more important than ever to properly identify and quantify property that is eligible for QIP treatment.

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Since the PATH Act removed the exclusion of Qualified Retail Improvement Property from bonus eligibility, it is more advantageous to use the 15 year recovery period offered by this category. For Qualified Restaurant Property however, bonus depreciation is limited to only those improvements that also meet the definition of QIP. QIP is a tax classification of assets generally including interior, non-structural improvements to nonresidential buildings placed in service after the buildings were initially put into use.

Saving Your Tax Liability with Accelerated Depreciation

You’ll need the manufacturer’s certification statement, which proves your windows meet ENERGY STAR Most Efficient Standards. This document is sometimes included with your windows and sometimes can be downloaded from the manufacturer’s website. Your receipt must clearly separate materials from labor costs, so ask your contractor to itemize these on your invoice.

Depreciation of windows for rental property using safe harbor

Going back to 2018 and 2019, you may now use bonus depreciation to fully deduct the cost of the improvements in one year. Alternatively, you may elect out of bonus depreciation and depreciate the improvements over 15 years instead of 39 years. Technically, such improvements are not QIP, but by law, they are “qualified real property” are windows qualified improvement property for purposes of Section 179. QIP does not include improvements related to the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

QIP is therefore 100% deductible in the year the QIP is placed in service. Both the Tax Cuts and Jobs Act of 2017 and the CARES Act of 2020 made changes to the amount of bonus depreciation you could take on qualified improvement properties. As of the latest changes, the bonus depreciation rate starts at 100% and is decreasing by 20% each year, starting in 2023.

Some contractors may push back on breaking down costs, but you should insist on it. The program covers 30% of your window material costs, up to that $600 annual limit. However, labor costs don’t count — only what you pay for the actual window materials. I learned this the hard way and had to go back to my contractor asking for a breakdown of material versus labor costs because you need those numbers for your tax return. Large dollar amount lump sum improvements should not be automatically recorded as QIP with bonus depreciation.

Understanding Qualified Improvement Property Depreciation

• QIP does not include improvements related to the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.
• If you have a mixed-use building, an income test is required to determine if the building is depreciated as residential property (27.5-yr class life) or longer-lived commercial property (39-year class life).
• Some contractors may push back on breaking down costs, but you should insist on it.
• Improvements to non-residential commercial real property such as an office building are ordinarily depreciated over 39 years and don’t qualify for bonus depreciation.

This provision corrected a flaw in the Tax Cuts and Jobs Act (TCJA) of 2017, and has made QIP eligible for bonus depreciation of 100%, applied retroactively to tax years beginning after December 31, 2017. That means renovations to multi-family housing, apartments, or assisted living facilities do not qualify. If you’re interested in learning how much you could save by taking accelerated depreciation through cost segregation, check out our free tax refund estimator. With just a few questions, you’ll get a reasonable estimate of your tax savings based on your property’s general characteristics. However, the net present value of money means you can achieve more with it through compound interest the sooner you have it, so it always makes sense to take more tax savings upfront.

The IRS wants specific documentation, and your contractor might not automatically provide everything you need. As mentioned earlier, QIP placed in service in 2021 and 2022 is eligible for 100 percent bonus depreciation. Using bonus depreciation to fully deduct the cost of QIP in one year can provide a substantial deduction resulting in a net operating loss (NOL) for the year, depending on your other income and expenses.

• Let’s say you’re replacing 10 windows at $300 each in materials costs (with separate labor costs).
• QIP, Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Improvement Property may be eligible for Section 179 expensing subject to certain limitations.
• However, labor costs don’t count — only what you pay for the actual window materials.
• The definition covers work done by either the building owner or a tenant.

The same applies to land improvements, which must be categorized and depreciated separately. Cost segregation studies are important for qualified improvement properties because they provide the information needed to properly take the claim. During a study, your CPA categorizes all of your eligible property components into different depreciation categories and periods. This process can help you determine what is eligible as QIP and what bonus depreciation you can take.

The rules for each category of qualified improvements have changed several times over the last decade making it difficult for tax professionals to keep track. These assets are specifically eligible for Section 179 expense deduction, but are limited to the entity’s taxable income and the partners themselves at an individual level. It must be depreciated – although it may be eligible for section 179 depreciation deduction since your income appears to be high enough to support it. Go ahead and enter the deduction in to TurboTax as a depreciable asset and see if you qualify. Starting from tax years beginning after December 31, 2022, the 100% bonus depreciation deduction will gradually decrease by 20% each year until it reaches a complete phase-out by the end of the 2026 calendar year. This means that deductible amounts will be reduced to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and finally 0% in 2027.

Improvements must explicitly exclude expansion of the building, elevators and escalators, and changes made to a building’s internal structural framework. Any property that is subject to the rules of QIP and is leased by a single tenant now falls under the rules for QIP for tax accounting purposes. Yes, you can claim the window tax credit even if you install the windows yourself. The IRS allows DIY installations, but you should be aware of some practical considerations before attempting your first window replacements. You can only claim the cost of the window materials — your own labor has no dollar value for tax credit purposes, which actually works in your favor if you’re not paying for professional installation anyway.