Can You Write Off a New Furnace on Your Taxes?

While a standard furnace replacement is not a deductible expense for a personal residence, homeowners can achieve tax savings by installing specific high-efficiency models. The federal government encourages energy conservation through tax credits that directly reduce your tax liability. These incentives are targeted at units that meet stringent energy-saving standards.

The primary way to receive a tax benefit for a new furnace is through the Energy Efficient Home Improvement Credit. This credit is designed to reward homeowners for making their properties more energy-efficient, helping to offset the cost of purchasing and installing qualifying equipment and making the upgrade more affordable.

Qualifying for Home Energy Tax Credits

To be eligible for the Energy Efficient Home Improvement Credit, the furnace must be for an existing home you use as a residence, not for a newly constructed home. While some upgrades eligible for this credit must be for your primary residence, the rules for energy equipment are different. A qualifying furnace can be installed in either your primary or second home, as long as you use the property as a residence.

The furnace’s efficiency is the most important criteria. A natural gas, propane, or oil furnace must meet or exceed the highest efficiency tier established by the Consortium for Energy Efficiency (CEE) to qualify. For gas-fired furnaces, this generally means the unit must have an Annual Fuel Utilization Efficiency (AFUE) rating of 97% or higher. Homeowners should verify that a specific model meets these standards on the ENERGY STAR or CEE websites.

The costs used to calculate the credit include more than just the furnace itself. The total qualifying expenses encompass the amount paid for the furnace unit plus the costs for professional installation labor.

Calculating the Tax Credit Amount

The Energy Efficient Home Improvement Credit is calculated as 30% of the total qualifying costs, which includes both the furnace and the installation fees. However, the credit amount is subject to specific annual limits that taxpayers must observe.

For a qualifying furnace, the tax credit is capped at $600 per year. This furnace-specific cap is part of a broader annual limit for all combined energy-efficient home improvements, which is $1,200.

For example, if you claimed the full $600 credit for a new furnace, you would have $600 remaining that you could potentially claim for other qualifying projects in the same year, such as new energy-efficient windows or insulation. Certain items, like heat pumps, have a separate, higher annual limit of $2,000.

Required Documentation and Records

Proper record-keeping is needed to substantiate your claim for the Energy Efficient Home Improvement Credit in the event of an IRS inquiry. You must retain all relevant documents that prove the eligibility of your purchase and the costs incurred.

The most important documents are the purchase receipts and invoices from the sale and installation. These should be itemized to clearly show the separate costs for the furnace unit and the professional installation labor. A detailed invoice provides a clear breakdown of expenses.

You will also need to obtain a Manufacturer’s Certification Statement. This is a signed document from the furnace manufacturer attesting that the specific product model you purchased qualifies for the tax credit, and it is often available on the manufacturer’s website.

For property placed in service after December 31, 2024, you will also need to report a product identification number from the manufacturer on your tax return.

Claiming the Credit on Your Tax Return

After confirming eligibility and gathering documents, the final step is to claim the credit on your federal income tax return. The credit is nonrefundable, meaning it can reduce your tax liability to zero, but you will not receive any of it back as a refund beyond what you owe in taxes.

The Energy Efficient Home Improvement Credit is claimed by filing IRS Form 5695, Residential Energy Credits, with your annual Form 1040 tax return.

You will use the information from your receipts and the manufacturer’s certification to complete Part II of this form. After calculating the total credit on Form 5695, the final amount is transferred to your Form 1040, which directly reduces your total tax liability for the year.

Special Circumstances for Furnace Costs

The tax treatment of a new furnace differs if the property is used for business purposes. In these situations, the expense is not eligible for the home energy credit but may be deducted through other means. These special rules apply to rental properties and homes with a qualifying home office.

For a rental property, a new furnace is considered a capital improvement, not a repair. As a capital improvement, its cost cannot be fully deducted in the year of purchase. Instead, the cost must be depreciated over a period of 27.5 years for a residential rental property, according to the Modified Accelerated Cost Recovery System (MACRS).

If you have a qualifying home office, a new furnace is treated as an improvement to the entire home. You would depreciate the business-use percentage of the furnace’s cost over 39 years. For example, if your home office occupies 10% of your home’s square footage, you could depreciate 10% of the furnace’s cost as a business expense.