Energy Tax Credit Basics For Investors & Homeowners

By

Tax season represents one of the most divisive times of the year; it’s either dreaded for fear of owing money to the federal government or anticipated with excitement. Meanwhile, there is an entire industry with a propensity towards the latter: real estate investors. Entrepreneurs dealing primarily in real estate are in a unique position to reduce their exposure to costly taxes and maximize returns. That is, of course, if they know about each and every deduction they are entitled to make.

Not all deductions are as obvious as we would like to assume; there are some that are easier to miss than others. The energy tax credit, for example, is underutilized, but instrumental for those who want to maximize their tax returns. Investors who want to make the most out of their upcoming tax season need to not only be aware of the energy tax credits made available, but also how to capitalize on them.

Types Of Energy Tax Credits

The government has made the need for clean, renewable energy more apparent than ever before, as evidenced by the numerous energy tax credits made available to homeowners and real estate investors. Consequently, a number of energy tax credits have been introduced to incentivize the addition of environmentally conscious upgrades. It is now easier than ever to simultaneously reduce your carbon footprint while maximizing your tax return.

Whether you are a landlord or traditional homeowner, these credits may be able to help you maximize your tax return and improve the efficiency of your property:

  • Residential Renewable Tax Credit
  • Non-Business Energy Property Tax Credit
  • Solar Energy Tax Credits

It is worth pointing out that a number of tax credits for residential energy efficiency expired at the end of 2016, but have since been renewed under the Bipartisan Budget Act of 2018. In an attempt to promote energy efficiency, the Bipartisan Budget Act of 2018 extended residential energy efficiency tax credits through December 31, 2021, according to ENERGY STAR. That said, you’ll want to make sure these tax credits are still being offered before you make any attempt to claim them, as rules and regulations are always changing.


[ Thinking about investing in real estate? Learn how to get started by registering to attend a FREE real estate class offered in your area. ]


Energy STAR tax credit

Non-Business Energy Property Tax Credit

The residential renewable tax credit is designed to promote more efficient heating and cooling systems in today’s homes. More specifically, however, homeowners may be credited 10% of the cost for making any of the following improvements in 2019 (including installation and labor costs):

  • Electric heat pump water heaters
  • Electric heat pumps
  • Natural gas, propane, or oil water heaters
  • Central air conditioners
  • Natural gas, propane, or oil water boilers
  • Natural gas, propane, or oil furnaces
  • Advanced main air-circulating fan used in a natural gas, propane, or oil furnace
  • Biomass fuel stoves

Qualifying taxpayers may claim up to $500 on Form 5695. In order to make the claim, however, homeowners will need to do a lot more than say they made the necessary changes; they will need certification statements from the manufacturer suggesting the appliance meets the criteria set forth by the credit.

Residential Renewable Tax Credit

The residential energy efficient property credit awards qualifying upgraders 30% of the cost of alternative energy equipment installed on or in a home (including the cost of installation). Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property.

Solar Energy Tax Credits

In an effort to promote the use of solar power, both the Environmental Protection Agency (EPA) and the Department of Energy are offering significant tax credits to those who add solar systems to their primary residences. The owners of rental properties, however, can only claim this tax credit if they live in the rental for part of the year and place it in service for the rest of the year. In doing so, the credit will be reduced to reflect the limited residency. Rental property owners who live in the home for three months out of the year, for example, may only be entitled to 25% of the credit.

Through 2019, qualifying installments will credit homeowners 30% of the total costs. However, the 30% solar energy tax credit is only available through 2019. After that, the amount of credit offered to homeowners will tapper down each year until it eventually hits zero in 2021. Therefore, the longer you wait, the less of a credit you’ll be entitled to.

As a credit, homeowners may take the amount directly off their tax payment, as opposed to making a deduction from their taxable income. Outside of the final cost of the system, there’s no limit to the amount of credit one may receive for installing solar. According to TurboTax, in order to claim your credit “you must file IRS Form 5695 as part of your tax return; you calculate the credit on the form, and then enter the result on your 1040.”

Energy Tax Credits For Rental Property Owners

Most energy tax credits are only issued to the owners of primary residences. More specifically, none of the residential energy tax credits are available to owners of rental properties, with a few exceptions:

  • Geothermal Heat Pumps
  • Solar Panels
  • Solar Water Heaters
  • Small Wind Energy Systems

Each of these energy tax credits are intended for homeowners’ primary residences, but they may be extended to those who rent out their home for part of the year. Rental property owners who live in the rental property for a portion of the year, for example, may claim these credits for the portion of the time they occupy the subject property.

According to Section 25D(e)(7) of the Internal Revenue Code, via ENERGY STAR’s website: “Allocation in certain cases. If less than 80% of the use of an item is for nonbusiness purposes, only that portion of the expenditures for such item which is properly allocable to use for nonbusiness purposes shall be taken into account. This means if you live in the home less than 80% of the year, then you can only take a percentage of the credit based on the amount of time you actually occupy the home. If you live in this home for 6 months out of the year, then you can take 50% of the 30% tax credit.”

Summary

When it comes to tax returns, the whole really is greater than the sum of its parts. Alone, energy tax credits may not allow anyone to retire any earlier, but yearly contributions to profits are invaluable. Therefore, make sure you are taking advantage of all the energy tax breaks you are entitled to. In order to maximize your returns, you need to capitalize on every tax break, deduction and credit available. It isn’t until everything is accounted for that your bottom line is fully realized.


Key Takeaways

  • Each energy tax credit may not be a huge deal, but a number of them together can really save you a lot of money.
  • The federal energy tax credit is grossly underutilized, but instrumental for those who want to maximize their returns.