Tax Credits & Deductions for New Home Builds in 2024
Can You Deduct the Cost of a New Home Build?
Most people don’t know that you can deduct aspects of your new home build from your taxes or receive tax credits. Once the construction is complete, you can deduct the mortgage interest on the loan used to finance the construction, as well as property taxes paid on the home. You may also be able to receive tax credits for the purchase of climate-friendly products in your home, such as appliances, solar, or batteries.
New Home Construction Deductions & Tax Credits in 2023
There are a few common tax deductions and credits for new home builds, which we’ve outlined below.
Mortgage Interest Deduction: Mortgage interest on a construction loan used to build your home is generally deductible during the construction period. The deduction for mortgage interest is subject to certain limits, including a cap on the amount of debt that can be used to finance the home, which is currently set at $750,000 for mortgages taken out after December 15, 2017.
Property Taxes: Property taxes are deductible on your federal income tax return as an itemized deduction, including property taxes paid on existing and new construction homes. The deduction for property taxes is subject to certain limits, including a cap on the combined amount of state and local taxes that can be deducted, which is currently set at $10,000 for tax years 2018 through 2025. Additionally, to claim the deduction, you must itemize your deductions on your tax return.
Solar Energy: All new builds in California require solar to be integrated into the home and there are tax credits available. The federal government offers a solar Investment Tax Credit (ITC) that allows you to deduct a percentage of the cost of a solar energy system from your federal taxes. The credit is currently set at 26% of the cost of the solar system for residential properties. To qualify for the ITC, the solar energy system must be installed on your primary or secondary residence and meet certain requirements. The system must also be new and not previously used, and you must own the solar panels rather than lease them. Additionally, some state and local governments offer their own tax credits or rebates for solar energy systems. Most solar systems can cost between $15,000 - $40,000, so the credit can be significant. If you have specific medical needs, you can also get additional non-tax incentives.
Sales Tax: Homeowners can deduct any costs paid to state sales tax for a sales tax deduction. This could be, for example, sales taxes on building materials if the taxes paid are greater than the standard state and local income taxes. However, this deduction is only available if you itemize your deductions on your tax return and if it makes sense given your overall tax strategy. To claim the sales tax deduction for your new home build, you'll need to keep detailed records of your purchases and the sales tax paid.
Medical Needs or Disabilities in New Build: People with disabilities or medical needs may be able to deduct certain items related to their new home build on their taxes. The Internal Revenue Service (IRS) allows taxpayers to deduct the cost of home improvements that are made for medical purposes as a medical expense. To be eligible for the medical expense deduction, the home improvement must be deemed medically necessary by a physician or other qualified medical professional. Additionally, the cost of the improvement must exceed 10% of the taxpayer's adjusted gross income (AGI) in most cases. Examples of home improvements that may be eligible for a medical expense deduction include:
Installing wheelchair ramps or lifts
Widening doorways and hallways
Installing handrails and grab bars
Lowering kitchen cabinets and countertops
Installing specialized lighting and electrical outlets
What Items Are Not Tax Deductible When Building a New Home?
Unfortunately, most aspects of a home build are not tax-deductible. While there are some expenses that can be deducted, such as mortgage interest and property taxes, many of the costs associated with building a new home, such as the cost of the land, construction materials, labor, and general contractor fees, are not eligible for tax deductions.
Benefits of a New Home Build
While many aspects of a new home build may not be tax-deductible, building a custom home in a once-in-a-lifetime opportunity and offers many benefits. Working with Buildable, we manage all the challenging aspects of the project to make it easier than ever. The following are our top 7 benefits of a custom home.
A floor plan that fits your lifestyle
Building a custom home enables you to design a home exactly for your family’s needs. Don’t need a dining room? Want a closet designed to fit all your shoes? Want an open floor plan? You will be able to design how you and your family use your house, which is different than buying an existing home where you need to force fit your lifestyle on a previously designed home. Everyone has a vision for the size and features of every space, and building a custom home is the only way for you to get exactly what you want.
Self-expression
When you design your custom home, you get to choose every feature, no matter how big or small. A million different design details can elevate your space and give it the personal touch you’re looking for. While new construction homes are designed to appeal to a wide range of potential buyers, your custom home is designed for you and only you. That means you have the creative freedom to build a home that’s filled with character. You and your family will love living in a house that reflects your personality and makes you feel right at home. Building a custom home saves you from costly renovations after you move in, which are seldom factored into your initial budget.
More land
Most new construction homes are in a subdivision, where the builder is incentivized to keep the lot as small as possible to maximize the number of homes they can build. One of the biggest benefits of choosing to build your own custom home is that you get to choose the lot it will be built on. Most of the lots we find for our clients in San Diego are 1 acre or more. If yard space is a priority for you, building a custom home might be the best way to get it. For more details, check out our article on how to find the right land for your custom home.
Latest technology and innovations
New technologies are constantly hitting the market that can vastly improve the usability of your home. From smart showers, to multi-room audio, to floors that are waterproof and durable, there are a number of innovations and high-tech features that can take your home to the next level. A custom home will allow you to build something that you can’t find on the market, or that would be very costly to add to an existing home.
More reliable home
As a home gets older, the natural wear and tear of living takes a toll on the space. This can quickly become a headache for homeowners as they find themselves dealing with one issue after another. Everything in your custom build will be brand-new, so you won’t have to worry about underlying issues cropping up. New custom homes will also come with warranties in most areas, so you can rest easy knowing that if something breaks, it will be fixed.
More energy efficient
With the advancement of technology, newer products are far more energy efficient than older ones. This has environmental and financial benefits that can impact your monthly living costs. Many of our clients find that although they are building close to double the size of their existing home, their energy bills can drop once they move into their new custom home.
Equity built-in
Building a custom home requires a bit more effort than buying an existing home, but you also get the rewards of your effort. Recently a custom home that we built for $1.1M was valued by a certified appraiser at $1.6M. There’s a lack of new homes in the market, so custom homes are traditionally delivered at the highest price. We can’t guarantee that all our home builds will appreciate like the above, but it’s safe to say that plenty of our past clients have seen the rewards of building their custom homes.
These benefits are impressive to most clients, but we are sure you have more questions. If you would like to learn more, check out our article about the cost of building a custom home.
Build Your Home in San Diego with Buildable
Building a custom home takes an immense amount of time and effort, but with the right team, the end result will be well worth it. The process can appear overwhelming to those who start the journey alone; however, building your dream home can be simple when you approach the process with experts by your side who can guide you through every step. Buildable specializes in luxury custom home construction, meaning we have the experts on our team that you need to have a stress-free home build, and create the luxury home of your dreams. We have over 40 years of home building experience within our team, and over 1,000 homes built. Read about our team, talk to us, and get the answers to questions you may have about starting the custom home building process in San Diego.
