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Adding an HVAC system to a home or building is almost always a wise call. Investing in newer, more energy-efficient heating and cooling systems carries many benefits, from reduced operational noise to lower energy bills, fewer repairs, less energy consumption, and better efficiency for your comfort.

You can expect an extended lifespan from your HVAC unit and better air quality, which is especially great for those with breathing difficulties from asthma to allergies. 

However, now that you’ve gotten an HVAC system installed, the question of what to consider it for tax implications is weighing heavily on you. Is HVAC equipment or a building improvement? Can it be both? 

HVAC income tax

 

What Is a Building Improvement? What Is Equipment?

 

Before answering that question, let’s assess what it means to qualify as equipment versus a building improvement, starting with equipment. 

Equipment is tools or items that serve a function, such as office equipment to make work easier or heating and cooling equipment for better comfort at home or the workplace. 

You encounter equipment all the time in your day-to-day life, from kitchen equipment like a toaster oven to construction equipment like hammers. Even a smartphone is considered electronic equipment. 

As you can see, the definition is broad, allowing more items to qualify. 

Switching gears, a building improvement is a much narrower definition by comparison. It only applies to buildings, including commercial and residential properties. 

A building improvement makes changes to an existing building rather than starting from scratch. The goal, as the name would imply, is to make the building better in some way. 

That usually includes making it monetarily more appealing but can also mean improving its functionality or expanding its usage. 

Here’s a simple example. Let’s say you move into a home. You knew it didn’t have a lot of square footage, but that was fine for where you were in your life when you bought it. Years later, as you’ve started a family, you wish for more space, so you decide to get an extra room or two built.

This is a building improvement. The home will have more space and square footage, making it a more comfortable living space. The new construction will increase its curb appeal, as will its larger size. 

Commercially, a building improvement example is redoing the interior lighting. If an office had overhead florescent lights but switches to LED lighting, this makes a major difference even if it seems like a small change. 

Fluorescent lights can contribute to minor health problems such as eye strain, headaches and migraine, blurry vision, dry eyes, and anxiety. The lights also contain mercury, a toxic substance. You’re not exposed to the mercury when in a room with fluorescent lighting, but if a light ever breaks, your health could be at risk.

By comparison, LED lights are inexpensive, last longer, and don’t cause nearly as many health maladies. Changing the lights would count as a building improvement. 

 

Is HVAC a Building Improvement or Equipment?

 

Now that you know the basics of equipment and building improvements, where does HVAC qualify?

Technically, it can be both equipment and a building improvement. HVAC systems like a heat pump, air conditioner, or furnace are pure definitions of equipment. In this case, they’re heating and cooling equipment.

They also match the definitions for building improvements. Here’s why:

  • HVAC systems make the home more comfortable to live in by improving the air quality and the temperature all year long. 
  • Adding an HVAC system to the home doesn’t require a lot of complex installation, only an outdoor unit and indoor air-handling units in the case of a ductless mini split system. You won’t degrade the visual appeal of your home, the same of which can’t be said for larger heating and cooling units.
  • HVAC systems will save you money in the long run. They’re relatively inexpensive to install, and since they’re energy-efficient, you’ll pay less on your monthly bills. The HVAC system eventually pays itself off. 
  • Upgrading your old heating and cooling units to energy-efficient HVAC will increase your home’s value, as it’s a more covetable system than older units. 
  • HVAC units could improve the longevity of the home by controlling humidity and temperature extremes. 

Why Does It Matter Whether HVAC Is Equipment or a Building Improvement?

At the end of the day, this isn’t a matter of to-may-toe versus to-mah-toe. If your HVAC unit is a building improvement, you’re going to want to know about it because you could enjoy some tax benefits.

If you were hoping for a deduction, that’s not going to be the case. It’s not because it’s an HVAC unit; building improvements aren’t traditionally eligible for tax deductions. 

However, if the improvements make your home more energy-efficient, you might be able to claim a tax credit that’s usually valued at up to $2,500. 

You can also put the cost of the home improvement toward capital gains taxes, which are your adjusted basis minus the price the home sells for. The higher the adjusted basis, the lower your taxes might be at sales time, allowing you to recoup more money that can go toward your next home.