Is a New Water Heater Tax Deductible?

Whether a new water heater can be written off on your taxes depends on the situation. The tax benefit is influenced by the property where the unit is installed and its energy efficiency. For a personal residence, the benefit is a tax credit, which directly reduces your tax liability dollar-for-dollar.

For a rental property, the cost of a new water heater is a capital improvement. This means it is not fully deducted in the year of purchase but is instead recovered over time through depreciation, which lowers your taxable rental income annually.

Tax Credits for a Primary Residence

Homeowners who purchase a new, energy-efficient water heater for their primary residence may be eligible for the Energy Efficient Home Improvement Credit. This is a nonrefundable credit, meaning it can reduce your tax liability to zero, but you will not get any of it back as a refund. The credit was updated by the Inflation Reduction Act of 2022, establishing new annual limits for expenses incurred from January 1, 2023, through 2032.

The credit is calculated as 30% of the total cost of certain qualified energy-efficient home improvements. For electric or natural gas heat pump water heaters, homeowners can claim a credit of 30% of the cost, up to a maximum of $2,000 per year. This $2,000 limit is distinct from the general $1,200 annual limit for other improvements like windows and doors.

To qualify, the water heater must meet energy efficiency standards established by the Consortium for Energy Efficiency (CEE). You should verify that the specific model meets these requirements, which are detailed on the manufacturer’s product information or the Energy Star website. The costs eligible for the credit include the price of the water heater unit and the labor costs for its installation.

The credit has no lifetime dollar limit, allowing homeowners to claim it annually for new qualifying improvements. For example, if you install a qualifying heat pump water heater one year and new energy-efficient windows the next, you could claim the respective credits in each year. Starting in 2025, taxpayers must report a product identification number from the manufacturer on their tax return to claim the credit.

Deductions for a Rental Property

When a new water heater is installed in a rental property, the cost is treated as a capital improvement, not a tax credit. A capital improvement is an investment that adds value to the property or prolongs its life, so its cost is not fully deducted in the year of purchase.

As a capital improvement, the cost of the new water heater and its installation must be recovered through depreciation. A water heater may be treated as part of the building and depreciated over 27.5 years, or it can be classified as personal property, allowing for a shorter 5-year depreciation period. The correct classification depends on whether the unit is a standalone appliance or a structural part of the building’s plumbing system.

The property owner reports rental income and expenses on Schedule E (Form 1040). To calculate and claim the annual depreciation deduction for the water heater, the owner must file Form 4562, Depreciation and Amortization.

Required Information and Documentation

To claim the Energy Efficient Home Improvement Credit, you must keep records to substantiate the credit, though these documents are not filed with the tax return. You should keep these records with your tax papers in case of an audit.

The primary documentation is the itemized receipt for your purchase. This receipt should show the date the water heater was placed in service and break down the costs, separating the price of the unit from the installation labor fees, as both are eligible.

You will also need a Manufacturer’s Certification Statement. This is a signed document from the manufacturer attesting that the water heater model meets the qualifying energy efficiency standards for the tax credit. This statement is for your records and can usually be downloaded from the manufacturer’s website.

The tax form used to claim the credit is IRS Form 5695, Residential Energy Credits. On Part II of Form 5695, you will enter the costs for your qualifying heat pump water heater using the figures from your itemized receipts.

How to Claim the Credit

After completing Form 5695, you must attach it to your Form 1040 when you file. The total credit amount calculated on Form 5695 is then transferred to Schedule 3 (Form 1040), Additional Credits and Payments.

This schedule consolidates various nonrefundable credits from different forms into a single total. From Schedule 3, the total amount of your credits is carried over to the main Form 1040. Here, the credit directly reduces your total tax liability for the year.